I’m a pensioner and interest-only mortgage prisoner: Will a DWP loan only pile more interest onto the 9.75% I already pay? Steve Webb replies
I retired last year and I have my pension and pension credit. The Government has offered to help with the interest on my interest-only mortgage, but no one I have asked actually seems to be able to tell me how it works.
I am one of those mortgage prisoners and my interest is already at 9.75 per cent. If the Government pays that but also adds more interest, then I will not have much equity left when I have to sell my home as the mortgage runs out in about four years time.
There is no information on whether I can stop the Government’s help and pay what I’ve borrowed when I sell the house, or whether I have to start paying it back as soon as I stop the help, in which case I may have trouble paying that and the mortgage, depending on what the interest rate is then.
Any advice you can give me would be greatly appreciated.
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Pensioner help: Will a DWP loan only pile more interest onto the 9.75% I already pay on my mortgage? (Stock image)
Steve Webb replies: I was sorry to read that you have been faced with paying such a high interest rate as a ‘mortgage prisoner’.
For the purposes of this answer, I will assume that you’ve already explored any other options that may be available to those who are trapped this way.
In terms of the benefits system, you are correct to say that as someone on pension credit you are potentially entitled to help with mortgage interest costs. The help is however extremely limited for reasons I will explain.
In the past, if you were on pension credit and had a mortgage you would have been able to get your mortgage interest costs met (up to certain limits) as an addition to your benefit.
However, the Government has abolished this help and replaced it with a system of repayable loans.
The system is known as ‘support for mortgage interest’ and there is more about it on the gov.uk website.
The way it works is that the Government will make a contribution to your mortgage interest costs if you are on certain benefits.
For those on pension credit, help is available as soon as you start your claim but for those on working age benefits there may be a ‘waiting period’ of between three and nine months on benefit before you can get help.
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The Department for Work and Pensions will then make a contribution to your mortgage which it will pay direct to your lender.
However, there are two important differences between the amount you are actually paying and the amount they are willing to cover.
The first is that they will only pay interest on the first £200,000 of a loan for those of working age and only on the first £100,000 for those, such as yourself, who are on pension credit.
This means that if your mortgage balance is over £100,000, any interest on the extra amount will not be covered.
Second, DWP pay interest at a standard rate, regardless of the interest you are currently paying.
The gov.uk website indicates that this rate is currently 2.65 per cent, though this could change. This is obviously only a fraction of the rate you are currently paying.
These DWP payments to your lender will continue and they will keep a tally of how much they have paid. They will also charge you interest on the amount they have paid on your behalf, and the interest rate that they charge is currently 3.03 per cent.
Eventually, when you sell or transfer ownership of the property, the full amount you have borrowed plus interest will have to be repaid to the DWP.
Your initial mortgage lender has ‘first charge’ on the proceeds of your sale, but DWP then takes its share of what is left.
Compared with the old system of benefit payments to cover mortgage interest this is a much less favourable system, not least because you have to repay with interest any payments which DWP make on your behalf.
However, if your finances are extremely stretched and you are struggling to meet your monthly repayments then these partial payments by DWP would be of some short-term benefit to you.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question about COPE and the state pension here.