What is the Support for Mortgage Interest (SMI) Scheme?

The Support for Mortgage Interest (SMI) Scheme is a government loan designed to help homeowners struggling to pay the interest on their mortgage or home improvement loans. By covering interest payments, SMI aims to alleviate financial pressure during hard times.

This article breaks down how the scheme works, the eligibility criteria, and the application process, providing essential information for those considering this form of support.

How SMI works

If you qualify, you can borrow up to £200,000 to pay your mortgage interest (although the amount you’ll get is capped based on a calculation of how much interest is due).

The loan can only be used to pay the interest on your mortgage or home improvement loan. You cannot use it to repay the amount you borrowed, any repayments you’ve missed, insurance policies (such as mortgage protection), or anything else.

How to get an SMI loan

You’ll be offered an SMI loan if you’re eligible for one when you apply for a qualifying benefit (listed below). If you’re already receiving one of these benefits, or if you’ve previously turned down an SMI loan, you may still be able to get one by contacting the office that pays your benefits.

Here’s a step-by-step process for applying for an SMI loan:

1. Check Eligibility: Before applying, ensure you receive one of the qualifying benefits: Income Support, Jobseeker’s Allowance (JSA), Employment and Support Allowance (ESA), Universal Credit, or Pension Credit. Your eligibility largely depends on this criterion. You cannot currently be receiving statutory sick pay, statutory maternity/paternity/shared parental/adoption pay, or income from employment or self-employment.
2. Wait for Contact: If you’re eligible through your benefit, you might automatically receive information about SMI from the Department for Work and Pensions (DWP) or your local Jobcentre Plus. This typically happens after you’ve been receiving the qualifying benefit for a certain period.
3. Request an Application: If you believe you’re eligible but haven’t been contacted, reach out to the office that manages your benefit. You can do this by phone, letter, or, in some cases, online through your Universal Credit account or other online benefit portals.
4. Complete the Application: Fill out the SMI application form you receive. This will require detailed information about your mortgage, the property, and your financial situation. Accuracy is key, so take your time and ensure all information is up-to-date and correct.
5. Provide Supporting Documentation: Along with your application, you’ll need to submit evidence of your mortgage and any home improvement loans, including recent statements and the terms of your loan. Sometimes, proof of your qualifying benefit is also required.
6. Loan Decision: After reviewing your application, the DWP will make a decision. If approved, they will inform you about the amount you’ll receive, the interest rate applied, and how the loan will be paid directly to your lender.
7. Sign and Return the Loan Agreement: If you agree to the terms, you’ll need to sign and return the loan agreement. Read this carefully, as it outlines your obligations under the SMI loan, including the condition that the loan is secured against your property and must be repaid under certain circumstances.
8. Payment Begins: Once everything is finalized, the government will start making payments directly to your lender to cover the interest on your mortgage or home improvement loan.

Remember, the SMI loan is indeed a loan, not a grant, meaning it accrues interest and must be repaid under the terms agreed upon. It’s important to consider this and possibly seek financial advice when deciding if SMI is the right option for you.

Repaying the loan

The loan doesn’t need to be repaid until you sell your home or transfer ownership of it to someone else. At this point, any money you make must first pay off the mortgage and any other loans secured on the property.

With the money left over, you’ll repay your SMI loan with interest. The interest rate is 4.5% at the time of writing (April 2024), but this is subject to change over time. If you don’t have money left over, or there’s only enough to partially repay the loan, the remaining debt is written off.

Alternatives to SMI

Unfortunately, many people who need help with their mortgage repayments are not eligible for Support for Mortgage Interest. However, you may be eligible for one of the following alternatives:

Mortgage payment holiday

Some lenders will let you take a mortgage payment holiday to pause or reduce your mortgage repayments for an agreed period, particularly if you have overpaid your mortgage in the past.

• What It Is: An agreement with your lender allowing you to temporarily pause or reduce your mortgage payments.
• How It Works: Interest continues to accumulate during the payment holiday, which may increase the total amount payable over the term of your mortgage. However, it provides short-term relief if you’re facing temporary financial difficulties.
• Considerations: Not all lenders offer payment holidays, and eligibility criteria can vary. It’s important to discuss the impact of a payment holiday on your future payments and total loan cost with your lender before proceeding.

Remortgaging

You could shop around for a better rate to reduce your repayments or remortgage to extend your mortgage term (thereby repaying the debt in smaller instalments).

• What It Is: Switching your current mortgage to a new deal, potentially with a different lender, to achieve lower interest rates or different terms.
• How It Works: By securing a mortgage with a lower interest rate or extending the mortgage term, you can reduce your monthly payments. This process involves applying for a new mortgage, which will pay off your existing mortgage.
• Considerations: Remortgaging may incur fees and require undergoing credit checks and property valuation. It’s essential to calculate whether the potential savings outweigh the costs involved in remortgaging.

Debt consolidation mortgage

If you’re struggling to budget for your mortgage repayments and other debts, a debt consolidation mortgage can group them together as one monthly payment.

• What It Is: A mortgage that consolidates your existing mortgage with other debts into a single monthly payment.
• How It Works: This type of mortgage can simplify your finances and potentially reduce your overall monthly outgoings. It involves taking out a new mortgage that is large enough to pay off your existing mortgage and other debts.
• Considerations: While consolidating debts can lower your monthly payments, it may increase the total amount of interest paid over the term of the mortgage. Careful consideration and financial advice are recommended.

Interest-only mortgage

Switching from a capital repayment mortgage to an interest-only mortgage can significantly reduce the amount you need to repay each month.

• What It Is: A mortgage where you only pay the interest each month, with the principal amount due at the end of the mortgage term.
• How It Works: This significantly reduces your monthly payments, as you’re not paying off any of the capital borrowed until the end of the term. At the end of the term, you must repay the original loan amount in full.
• Considerations: You’ll need a credible plan to repay the capital at the end of the mortgage term. Options include savings, investments, or selling the property. It’s crucial to ensure you have a reliable strategy in place to avoid future financial strain.

Each of these options has advantages and disadvantages, so it’s best to talk them through with an expert. To speak to a mortgage broker about your options, get in touch.