Support for Mortgage Interest (SMI) rate to fall

Posted by Richard Catlin in Mortgages on 18 June 2015 - Richard is Marketing Director at checkmyfile.

The government is cutting the amount of support it offers homeowners under its Support for Mortgage Interest (SMI) initiative, which is currently claimed by 161,000 people.

SMI is a means-tested benefit that covers the interest element of monthly mortgage repayments, based on a pre-established rate. That’s where the cut is coming in, with the rate that is used to calculate contributions being cut from 3.63% to 3.12%.

On a £100,000 25-year mortgage, the government contribution element will fall by around £43 a month.

The move is largely due to the big drops in high-street mortgage rates over the first half of 2015. Record-low rates continue to hit the headlines as lenders compete fiercely for new business. The rate used to calculate SMI contributions is calculated by comparing it to the average mortgage rate as provided by the Bank of England. When the difference is at least 0.5%, a change is triggered.

There current rate cut is tiny compared to the last one in 2010, when it was cut from 6.08% to the current 3.63% as mortgage rates tumbled as a result of a low base rate.

Whether the reduction in contribution will see an increase in the number of people struggling to meet repayments remains to be seen. The downward trend of mortgage rates cannot go on forever, and with the Bank of England likely to raise interest rates from 0.5% in the first half of 2016, average rates will increase.

Once they do, and assuming there are no policy changes to SMI, then eventually, the rate used for calculation should increase again.

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