The announcement creates an opportunity for insurers to create new policies for individuals looking to cover their mortgage payments in the event they become incapable of working, says the Building Resilient Households Group, which sought the clarification from the DWP with the Income Protection Task Force.
From 6 April 2018 people who suffer a loss of income from sickness or other causes can no longer get state benefits to cover their mortgage payments. Instead some people may be offered and qualify for a loan, called a Support for Mortgage Interest Loan (SMIL) in which case DWP will, where possible, put a charge on their property. This means that all mortgage holders now need to consider protection if they want to avoid eating into the equity in their home in the event of a prolonged sickness absence, an occurrence that affects two million people each year.
The DWP has confirmed that any income received from an insurance policy which is specifically intended and used to cover mortgage payments will be totally disregarded when entitlement to means-tested benefits is assessed. This applies to both legacy benefits and Universal Credit.
The concession is subject to two provisos. If insurance pay-outs are restricted to the payment of a mortgage, for example by being paid direct to the lender, they will be fully disregarded. But if the claimant has choice over how to spend the payments then only any portion which DWP judge to be intended and used for mortgage cover will be disregarded.
Further, if a claimant applies for a Support for Mortgage Interest Loan their insurance payout will be taken into account when their offer of a loan is considered. However, this scenario is unlikely to be a common one as people would have no need for a loan while receiving insurance payouts which fully cover their mortgage says the BRHG.
BRHG joint chair Richard Walsh says: “This clarification means thatpeople who choose to protect their mortgage payments with an appropriate insurance policy can do so without fear that their pay-outs will lead to their benefits being cut.
“Advisers should alert clients to the risk that loss of income through sickness or other causes may lead to mortgage holders into spiralling debt – and advise on appropriate protection.
“Insurers may see opportunities to design new protection policies with a portion specifically designated to cover mortgages”
LifeSearch CEO Tom Baigrie says: “This is an important first step in making private provision of disability benefits dove-tail sensibly with those offered to some by the state. I look forward to seeing a competitive race to launch the best and simplest to buy mortgage protection cover that pays its benefits to the lender and so meets the DWP conditions. That would be the first step in the transformation of income protection into a cover all consumers will want to have.”
Swiss Re technical manager Ron Wheatcroft says: “This announcement has no obvious impact on GIP because it is a pay roll income replacement benefit for sickness. As such (unlike IIP) it is taxed. And it is treated as earned income and as such is subject to a taper where around 37p in the pound of net GIP is disregarded anyway for UC purposes and available towards mortgage costs.”