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Mind the Gap!

How to Protect your Mortgage and your Income

Mind the Gap!

In last July’s Budget, the government announced significant changes to Support for Mortgage Interest (SMI), the welfare payment that is paid to homeowners to cover the interest payments on their mortgages if they lose their jobs, or become sick or disabled.

SMI is a means-tested benefit designed to help mortgage holders to pay the interest on their loan if they get into financial difficulties. The amount payable is currently set at 3.12% on loans up to £200,000 (£100,000 where the claimant is in receipt of Pension Credit). The capital repayments remain the borrower’s responsibility, as does any interest the lender charges over and above the set rate. The benefit is usually paid direct to the lender and does not have time limitations, with the exception of those in receipt of jobseeker’s allowance where the benefit is restricted to two years.

New rules

From April this year, the initial waiting period for receipt of SMI has been increased from 13 to 39 weeks, meaning that borrowers are expected to fund their mortgage for longer before receiving benefits, and as a result could face real financial hardship.

From April 2018, in a move designed to reduce the welfare bill and remove what some saw as a benefit that subsidised property purchase, the SMI rules will be completely revised. SMI will cease to be a non-refundable benefit and will instead become a form of loan. This means that the whole amount of any benefit received will have to be repaid with interest when the claimant is able to resume work, or repaid if the homeowner sells their property.

Protection to bridge the financial gap

There are a variety of policies available on the market that will pay out if you’re unable to work due to an accident, sickness or unemployment. They can make a big difference to families facing financial difficulties.

The changes in SMI rules highlight the importance of having proper financial safeguards in place that can be used to make income and capital repayments on your mortgage and help keep a roof over your family’s head.

In addition to mortgage payment protection insurance, there’s also critical illness cover designed to pay out a tax-free lump sum in the event that you are diagnosed with a serious illness (as defined in the policy), such as cancer, stroke or heart attack or on incapacity following an accident.

Working out how much cover you need shouldn’t be a daunting task. Although there are lots of options on offer and the choice can seem bewildering, working with your financial adviser will ensure you get the type of policy that’s right for you, ensuring you’re adequately protected against life’s unexpected and unwelcome events.

The changes in SMI rules highlight the importance of having proper financial safeguards in place.