Jump to content
House Price Crash Forum
Sign in to follow this  
1632656

Big Holes In The Housing Safety-net!

Recommended Posts

Big Holes In The Housing Safety-Net!

By Cliff D'Arcy | 2 July 2007

Being a homeowner can be tough.

Generally speaking, if you own your own home, your monthly outgoings are usually considerably higher than those of a tenant. This is partly due to a massive rise in house prices and mortgage debt over the past decade, which has pushed up the costs of housing for owner-occupiers. So, given that homeowners normally have higher living expenses than tenants, then the State support for owner-occupiers must be superior, right? Wrong!

In fact, State support for homeowners has slumped over the past decade. Indeed, I'd go so far as to say that the government has almost abandoned homeowners to the twists and turns of fate. This is largely because of the roll-back of the main benefit paid to homeowners, which is known as Income Support for Mortgage Interest (ISMI).

For example, in the 1994/95 tax year, the government paid a total of £1,014 million (more than a billion pounds) in ISMI payments to non-working homeowners who were unable to meet their mortgage repayments. Ten years later, in 2004/05, this figure had plunged by more than three-quarters (77%) to a mere £237 million.

To cut a long story short, the government decided after the last housing crash that the cost of supporting struggling homeowners was too high, so it took a knife to the ISMI regime. Hence, the State safety-net for homeowners today has been largely withdrawn, following sweeping cutbacks to ISMI from October 1995 onwards.

Thus, if you're a homeowner who can't keep up your mortgage repayments because your income has dried up for one reason or another, then get ready for a shock. The simple truth is that ISMI is fiendishly difficult to claim and, if you do get it, then it won't be enough to cover your mortgage in its entirety. Here's why:

i) If your home loan started after 1 October 1995, then you get no help whatsoever with your repayments for nine months (39 weeks), although the over-sixties receive help from day one.

ii) ISMI is paid at a standard interest rate (the Bank of England base rate plus 1.58%), or the rate which you pay if that is lower. Therefore, if the interest rate that you pay is higher than the ISMI rate, then you face a monthly shortfall.

iii) If your mortgage is greater than £100,000, then you lose out again, because only the interest on loans up to this sum is paid by ISMI. So, if you have a large home loan, then you face an even larger deficit.

iv) ISMI pays only your mortgage interest, not any capital repayments on a repayment mortgage. Hence, most homeowners will build up further arrears unless they temporarily switch to an interest-only loan.

v) ISMI leaves homeowners with repayment mortgages facing a shortfall, but it leaves those with interest-only loans in the lurch, too. That's because it provides no help with payments to savings and protection plans linked to your home loan, such as mortgage endowments, ISAs, pensions, life insurance policies, etc.

ISMI doesn't cover second mortgages and secured loans for non-essential home improvements, debt consolidation and so on -- it only covers first mortgages (home-buyer loans).

vi) Lastly, ISMI is means-tested, so you can't claim it if you have a partner (a spouse or someone who lives with you as if you were married) who works 24+ hours a week, you have savings of £8,000+, or you receive other income which disqualifies you. If you have savings of £3,000 to £8,000, then your entitlement to ISMI and other means-tested benefits reduces to zero on a sliding scale.

The sad truth is that very few people actually qualify for any ISMI grant, and the vast majority of those who do face a substantial shortfall on their housing expenses.

Finally, given that ISMI is such a scrappy safety-net, what can you do to protect yourself and your mortgage repayments against job loss and other risks? The government and mortgage lenders want you to fend for yourself, so they urge you to buy private insurance to protect against accident, sickness and unemployment, known as mortgage payment protection insurance (MPPI).

However, as I warned in The Shocking Cost Of Mortgage Cover, MPPI is a £10 billion scam, so don't buy it from mortgage lenders. Instead, by shopping around for a stand-alone policy from independent suppliers, you could slash the cost of this cover by three-quarters (75%). See Ditch Your Rip-off Protection Today for more details. For the record, leading low-cost providers of MPPI include Best Insurance, British Insurance, Paymentcare, the Post Office, and SecurityFirst.

Source: http://www.fool.co.uk/news/property-home/2...safety-net.aspx

So, watch out for the next housing downturn, because government support for homeowners is all but non-existent these days!

Edited by studdymx

Share this post


Link to post
Share on other sites
Big Holes In The Housing Safety-Net!

By Cliff D'Arcy | 2 July 2007

Being a homeowner can be tough.

i) If your home loan started after 1 October 1995, then you get no help whatsoever with your repayments for nine months (39 weeks), although the over-sixties receive help from day one.

And by stark contrast, your rent will be paid for you by housing benefit from day 1 if you're a renter.

Share this post


Link to post
Share on other sites
Thus, if you're a homeowner who can't keep up your mortgage repayments because your income has dried up for one reason or another, then get ready for a shock. The simple truth is that ISMI is fiendishly difficult to claim and, if you do get it, then it won't be enough to cover your mortgage in its entirety.

Tough, but if you can't afford the mortgage then reposessed and downsized is what you get.

Share this post


Link to post
Share on other sites
Guest Yeahbutnocrash

Good point

Everyone should check they have adequate insurance in case they lose their job or fall ill - It's common sense really

I guess that someone who has not insured their mortgage repayments against being out of work could switch to an IO mortgage if they become unemployed

Benefits used to cover paying the interest - I guess that's still the case? But as the OP says you get less benefits if you have savings which therefore makes insurance a good idea...

Edited by Yeahbutnocrash

Share this post


Link to post
Share on other sites
I guess that someone who has not insured their mortgage repayments against being out of work could switch to an IO mortgage if they become unemployed

Unless their mortgage is so high that they pay IO already. I think a lot of people coming off fixed rates will opt for IO mortgages.

Share this post


Link to post
Share on other sites

I believe insurance also has some "excellent" clauses.

No payment for 1st 6 months of redundancy / incapacity etc.

Only pay for up to 12 months

No payment if claim made within 1st 6 months of insurance

Add to that the huge premium for this service. I know only 1 person who has insured their mortgage payments (This is of about 10 people I've discussed it with) as most see it as a further, unnecessary expense.

As for switching your mortgage when / if you become unemployed ... How many banks will give a mortgage to someone with no income?

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 350 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.