From October, the Government plans not to meet the bill for the first 40 weeks of a claim for new borrowers, and to pay only half of the costs from week nine to week twenty-six for existing borrowers. The intention is that private insurers will cover the gap.
But proposals disclosed to the Social Security Advisory Committee detail a string of further cuts. Where people do not have private cover but payments are deferred, interest on the accumulated arrears will not be paid.
The new "standard rate" of interest to be paid will be set "at or around" the average. But it may not change every time interest rates change. And where individuals pay interest at above the average, social security will not meet that bill, even though ministers concede there will be "significant losers". At present 8 per cent or about 45,000 claimants are paying interest rates of 10 per cent or above, usually after taking out fixed-rate mortgages when rates were high.
But where the standard rate would produce significant gainers - about 2 per cent of claimants have mortgages at 5 per cent or below - only the amount they are actually paying will be covered. Without that, "it could be argued that there is in some cases a substantial advantage for this group to stay on benefit", the department has told the committee.
The new disqualification periods, however, will start from when people claim unemployment benefit, or the new Jobseekers' Allowance, so that those who use savings to pay their mortgage are not penalised. The Government accepts that the new restrictions, which include not paying interest on mortgages larger than £100,000, cannot be applied to pensioners on income support.
The Government will also consider whether the sick and disabled need similar protection, stating "it is important to establish the practical constraints on what insurers can provide".
Shelter said yesterday that lone parents on income support who are not actively required to look for work appeared to be caught by the new rules, and that the Government was being "disingenuous if not dishonest" in claiming that the new standard rate was intended merely to simplify operations, not withdraw benefit further. "If you are not going to receive the full mortgage interest you are paying, that, however you look at it, is a cut".
Shelter said it feared the proposals "will spark a fresh wave of repossessions. Many of the people we see are on short-term or part-time contracts. They are bound to have difficulty getting insurance, even when they can afford it." Ministers claimed in their submission that even without the proposals "lenders and insurers would have had to review their strategies for the long term in any event. The challenges of a changing labour market, a fixed low-inflation economy and borrowers' perspectives, shaped by the recent shake-out in the housing market, all need to be considered."
In asking for the committee's comments, the Government said it recognised there were practical difficulties in transferring all support to private provision and the changes "must take account of the overall government priority to support sustainable owner-occupation". But it was "a strategic aim of the DSS to encourage personal responsibility, wherever possible, in preference to public provision".Reuse content