Draft State Pension Credit Pilot Scheme Regulations 2010 etc - Merits of Statutory Instruments Committee Contents


APPENDIX 2: SOCIAL SECURITY (CLAIMS AND PAYMENTS) AMENDMENT REGULATIONS 2010 (SI 2010/796)


Information from the Department for Work and Pensions

7. How many customers receive Excess Payments?

7.1 In December 2008, the Standard Interest Rate (SIR) at which Support for Mortgage Interest is paid was frozen at 6.08% for 6 months from its baseline level of Bank of England Base Rate + 1.58% (2.08%). After subsequent extensions and the announcement made by the Chancellor for Budget 2010, the Standard Interest Rate will remain at 6.08% until December 2010.

7.2 The Support for Mortgage Interest caseload is currently estimated to stand at 220,000[17]. Around 190,000[18] Support for Mortgage Interest customers have their awards paid directly to lenders through Mortgage Interest Direct (MID), the remaining 30,000 customers have their awards paid directly to themselves.

7.3 Data from the Council of Mortgage Lenders and the Bank of England shows that the weighted average interest rate (at the point of sale) for mortgages taken out in the two years to January 2010 is 4.9%. Table 1 shows the average interest rate for different types of mortgage and the proportion of new mortgages by type.

Table 1 - Average Mortgage Rate and Mortgage Market by Type
Fixed Rate TrackerStandard Variable All
Average Interest Rate 5.4%4.6% 5.1%4.9%
Proportion of new mortgages issued over the last two years 62%26% 5%100%

Source: Council of Mortgage Lenders and Bank of England January 2010

7.4 In November 2009, we received a sample of data on almost 6,000 Support for Mortgage Interest claimants (around 3% of the total caseload) from sixteen different mortgage lenders, collected on our behalf by Council of Mortgage Lenders and HM Treasury. While the data is not a statistically robust sample and any results should be considered illustrative, and it is likely that the distribution of mortgage rates will have changed since the data was collected, it can provide a useful insight into the mortgages of Support for Mortgage Interest customers.

7.5 The Council of Mortgage Lenders sample data implies an average mortgage rate paid by Support for Mortgage Interest customers of 3.8%, well below the current Standard Interest Rate of 6.08%. Table 2 shows the average interest rate for different types of mortgage held by Support for Mortgage Interest customers and the proportion of customers holding these mortgages[19]. While Tables 1 and 2 provide useful background information on the mortgage market, they are not directly comparable as Table 1 provides information on the average mortgage rate at the point of sale from the past two years while Table 2 provides information of the average mortgage rate being paid at the time the survey was taken (Autumn 2009).

Table 2 - Average SMI Customer's Interest Rate and Mortgage Type
Fixed Rate TrackerOther Variable
Average Interest Rate 5.7%2.1% 4.2%
Proportion of mortgages held by SMI customers 32%28% 40%

Source: Council of Mortgage Lenders, November 2009

7.6 The estimated distribution of the mortgage rates paid by Support for Mortgage Interest customers is given in Table 3. At the current Standard Interest Rate of 6.08%, we estimate that 92% of Support for Mortgage Interest customers (180,000 people excluding non- Mortgage Interest Direct customers) will receive awards in excess of their eligible mortgage interest outgoings. However, even customers in this position do not necessarily receive Support for Mortgage Interest payments in excess of their full housing costs where part of their mortgage is ineligible (taken out for some purpose other than purchasing the property or making certain home improvements).

Table 3 - Distribution of SMI customer's Mortgage Rates

Interest Rate% of SMI Customers No. SMI Customers No. MID SMI Customers[20]
Below 7%99% 220,000190,000
<6.08%92% 200,000180,000
<5%73% 160,000140,000
<4%52% 110,000100,000
<3%38% 80,00070,000
<2%17% 40,00030,000
<1%3% 10,0007,000

Source: Council of Mortgage Lenders & DWP Quarterly Statistical Enquiry August 2009

7.7 Under the regulations, lenders will be required to apply Support for Mortgage Interest payments to customers' mortgage accounts in the way set out above; lenders would be unable to agree to any request for the excess to be paid over to the customer. The first priority will be to meet any current mortgage interest payments and the second priority will be to meet any arrears of mortgage interest. Thereafter lenders will be able to use the excess to repay the outstanding principal sum or any other liability in respect of the loan. Details of the extent of the excess payments that Support for Mortgage Interest customers might receive are given in Table 4.

Table 4 - Extent of Excess Payments for SMI Customers

Proportion of Applicable Mortgage Interest Covered by SMI % of SMI Customers No. SMI CustomersNo. MID SMI Customers
>400%14% 30,00028,000
>300%18% 40,00035,000
>200%38% 80,00075,000
>150%52% 110,000100,000
>125%65% 140,000130,000
>110%82% 180,000160,000
>100%92% 200,000180,000

Source: Council of Mortgage Lenders & DWP Quarterly Statistical Enquiry August 2009

7.8 Table 4 shows that over half of Support for Mortgage Interest customers are currently receiving payments that are at least 50 per cent higher than the actual interest due to lenders on the eligible loan. Around one fifth receive awards that are more than three times their mortgage interest payments.

7.9 Table 5 shows in cash terms what monthly excess Support for Mortgage Interest payments would be for various mortgage rates and various sizes of mortgages under the current Standard Interest Rate of 6.08%. For example, a Support for Mortgage Interest customer with a mortgage rate of 5% and an eligible mortgage of £25,000 would receive a monthly excess payment of £23. A customer with a mortgage rate of 1% and an eligible mortgage of £200,000 would receive a monthly excess payment of £847.

Table 5: Relationship Between Excess Payments, Mortgage Rates and Outstanding Capital[21]
Monthly Excess Payment
On an eligible mortgage of:
Mortgage Rate£25,000 £50,000£75,000 £100,000£150,000 £200,000
5%£23 £45£68 £90£135 £180
4%£43 £87£130 £173£260 £347
3%£64 £128£193 £257£385 £513
2%£85 £170£255 £340£510 £680
1%£106 £212£318 £423£635 £847



17   August 2009 DWP Quarterly Statistical Enquiry Back

18   August 2009 DWP Quarterly Statistical Enquiry Back

19   Only around half of the records in the CML sample data declared a mortgage type Back

20   Assumes MID customers have the same distribution of Mortgage Rates as Non-MID customers Back

21   These figures are indicative amounts based on stylised individuals. The monthly excess payment has calculated by applying the standard rate of interest to the capital amount of the mortgage and dividing this by 12 Back


 
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