Out of work face big cut in mortgage relief

PLANS are being drawn up to sharply cut the financial support paid by the state to homeowners who are made redundant, prompting fears of soaring repossessions and a collapse in house prices.

In the latest of a series of blows for mortgage borrowers, the Treasury is expected to push back the date at which the unemployed can claim support for mortgage interest (SMI) from three to nine months.

Such a move could increase arrears and repossessions and potentially depress house prices, experts have warned.

Around 23,000 borrowers in Scotland receive SMI and Shelter Scotland, the homeless charity, said reductions in SMI payments would put them at increased risk of losing their home.

Graeme Brown, director of Shelter Scotland, said: "It would be a disaster if the UK government was to change the waiting period to nine months after being made redundant before homeowners qualify for SMI.

"If they have to wait that long before they get SMI, there is every chance that it will be too late to stop them getting into arrears and facing repossession. This change would be regressive and make the pain of redundancy even harder for people already facing major financial challenges."

Sue Anderson, spokeswoman for the Council of Mortgage Lenders (CML), confirmed that she understood such a proposal had been mooted. She said: "We know this is on the table as a possibility, and hints are being given in this direction. We very much hope it won't happen, but the signs aren't encouraging."

The news comes amid fears of a second house price crash. The Halifax last week announced the biggest monthly property fall in 26 years in September, with values sliding 3.6 per cent, while the International Monetary Fund warned that UK house prices were overvalued and vulnerable to a fall, raising the prospects of a double dip.

And it follows last week's pledge to limit state benefits to 26,000 per family. The CML said it is not yet clear whether this figure would include mortgage interest support, which is currently available from the 13th week after someone has been made redundant. It is awaiting further clarification.

Unemployed borrowers with an average 121,500 loan face a mortgage repayments bill of 8,505 a year. Those at the top of the eligibility scale, borrowing 200,000, could be paying nearly 11,000 in interest.

Unemployed homebuyers are already struggling under fresh mortgage pain after support was last week slashed by 40 per cent. As of this month, SMI for those who have lost their jobs is halved from 6.08 to 3.63 per cent, to match the Bank of England's average mortgage rate. The change means that SMI payments on a 150,000 mortgage are being cut from 760 a month to 450, equating to 3,700 a year.

The waiting time for SMI was increased in 1995 to 39 weeks by the last Conservative government, but in January last year it was shortened by Labour to 13 weeks to help borrowers cope with the recession and rising unemployment.

The Treasury said that it would not comment on market speculation.