Government to cut ISMI

Chancellor George Osborne announced in his emergency Budget the government’s intention to cut support for borrowers in difficulty. MI

The Council of Mortgage Lenders says this is an unwelcome move and is calling for government support for income support for mortgage interest (ISMI) and mortgage rescue to re-assure current and future home-owners and lenders alike.

From this autumn ISMI will be paid at the level of the Bank of England’s average mortgage rate. Currently 3.67%, this is significantly lower than the existing ISMI rate of 6.08%, a level that has been maintained since December 2008 as a means of providing additional support for borrowers in most difficulty.

The change is likely to come into effect in October after the Department for Work and Pensions (DWP) has agreed changes with the social security committee and new regulations have been drawn up.

The DWP also needs to agree a process for how ISMI tracks the Bank of England mortgage rate, and a mechanism for triggering changes in payments. It is possible, for example, that the rate at which ISMI is paid may only change when the average mortgage rate rises or falls by 0.5%, thus avoiding the administrative problems associated with changing the rate too frequently.

Last year, the DWP reported that 204,000 households were getting mortgage loan payments through income support, jobseeker’s allowance or pension credit. The CML estimates that more than three-quarters of borrowers receiving ISMI payments at the existing rate currently have no arrears on their mortgage – a clear indication that it is currently delivering the support intended for borrowers.

Paying ISMI at a significantly lower rate will put the finances of these households under considerably more pressure. There is therefore a greater risk that arrears will rise again after October, and the performance of loans where the borrower is behind with payments may begin to deteriorate again.