The cuts planned by Peter Lilley, Secretary of State for Social Services, are in addition to those announced by the Government in last November's Budget. They involve replacing the existing system - where mortgage interest payments are based purely on the amount charged by lenders - to a new one, in which a standard rate applies.
Borrowers most likely to be affected are the self-employed, those with high fixed-interest mortgages, or with home improvement loans on which benefits are payable. They tend to have mortgages pegged at higher rates of interest than the norm.
The Council of Mortgage Lenders has been lobbying ministers to amend the plans. It estimated yesterday that, taken with the Government's other changes on mortgage relief, they could lead to up to 24,000 more repossessions a year. A person with a mortgage 1 per cent above the standard variable, currently around 8.4 per cent, would face a monthly shortfall of about £45 on £60,000.
A briefing paper from Mr Lilley's department to the Social Security Advisory Committee, which oversees changes to the benefit system, admits there would be "significant gainers and losers".
The DSS document says 8 per cent of claimants pay interest rates at 10 per cent or above, on which benefits can be claimed. A further 2 per cent of claimants pay 5 per cent or less. After 1 October, anyone who becomes unemployed will be paid mortgage interest based on a rate set by the DSS. This would roughly mirror existing variable rates. Existing claimants will be cushioned against losses by interim payments. But anyone becoming unemployed after October will not.
So-called "significant gainers" will not benefit from the changes either. Any extra money paid over and above the lower rate will be held on account by lenders and used to offset future changes in mortgage rates.
Although most loans on which higher-than-average interest rates are paid are for home improvements, Abbey National said about 5 per cent of its 1.2 million borrowers pay more than its 8.34 per cent variable rate, most of them for outright home purchases.
The DSS denied that the changes were to cut the amount paid out: "The administration of such payments are enormous and complex. We estimate the savings from moving to a standard rate will be of about £9m."Reuse content