David Simmons explains changes to the formula for calculating the standard interest rate used to determine help with housing costs.
Housing costs paid with income support (IS), income-based jobseeker’s allowance (JSA), income-related employment and support allowance (ESA), and pension credit (PC), for the repayment of loans for home purchases and repairs/improvements, are calculated using a standard rate of interest, rather than the rate actually paid by the claimant. Prior to 5 January 2009 (from November 2004), the standard rate was the Bank of England base rate plus 1.58 per cent. From 5 January 2009, the standard rate was changed to a fixed amount of 6.08 per cent, as part of a package of measures to support home owners through the recession. This protected level was one of the victims of the cuts introduced by the Government in the Emergency Budget on 22 June.
The new formula
A new formula for calculating the standard rate came into force on 1 October 2010.1The standard rate will be based on the average mortgage rate published by the Bank of England on a monthly basis (on a day referred to as ‘the reference day’). The average rate is based on a weighted average of the rates charged by approximately 30 UK-based banks and building societies, representing more than 75 per cent of mortgage business.2 The initial figure will be the average mortgage rate published by the Bank in August 2010, which was 3.63 per cent.
From 1 October, where on any reference day the Bank publishes an average mortgage rate which differs from the standard rate of interest in force on that day by 0.5 per cent or more, the standard interest rate is adjusted and takes effect for the purposes of calculating the claimant’s housing costs from a date determined by the Secretary of State. Any change in the average mortgage rate of less than 0.5 per cent is disregarded.
According to the Government’s Explanatory Memorandum on the new rules, in practice, it takes around 5–6 weeks to amend the standard rate in the DWP’s computer systems and implement subsequent changes to benefit awards.3Claimants will be sent letters notifying them in advance of any changes in the interest rate and the DWP will also write to organisations like Citizens Advice to notify changes. The current standard rate will also be published and publicised on the Directgov website. The DWP has issued guidance to decision makers on the new rules in Memo DMG 41/10, including examples of when and how the changes will take effect.4
The Government’s justification for the change is that the current fixed rate ‘is too high and therefore unsustainable’, whereas the new formula ‘will continue to provide claimants with protection against repossession at the same time as providing better value to money to the taxpayer and addressing the deficit’.5A return to the old formula would leave too many claimants with a shortfall, while paying the actual rate charged under each loan was too reliant on claimants and lenders notifying changes to the DWP, resulting in ‘substantial’ overpayments, fraud, error and administrative problems.6
The DWP has carried out an equality impact assessment of the changes, based on official data and a ‘small sample’ of data obtained from the Council of Mortgage Lenders in November 2009.7This">www.dwp.gov.ukThis suggests that that 92 per cent of ‘mortgage interest customers’ are currently receiving awards in excess of their actual eligible mortgage interest outgoings and that over half of those are receiving housing costs that are at least 50 per cent higher than their actual interest payments to lenders.
‘Under a standard interest rate of around 3.66 per cent, about 50 per cent of support for mortgage interest claimants would continue to have their eligible housing costs fully met by their benefit award. 52 per cent…would have at least 90 per cent of their eligible mortgage interest outgoings covered by their benefit awards and 93 per cent … would have at least 60 per cent of their outgoings covered’.8
The assessment states that the change ‘could potentially have a negative impact on child poverty although we expect this impact to be minimal’.
The assessment shows, however, that large numbers of claimants are likely to experience a sudden reduction in their housing costs from October, and that about 50 per cent of claimants receiving housing costs after that date are likely to face an ongoing shortfall between their entitlement to housing costs and their liability. This will result in an increase in hardship, debt and repossessions at a time when many claimants are struggling to make ends meet. Claimants with mortgage rates in excess of 3.66 per cent will most obviously be affected. Many will be paying higher rates of interest because their financial circumstances and prospects made it difficult or impossible for them to secure loans or ‘special deals’ at lower rates of interest.
According to the National Housing Federation, which represents 1,200 not-for-profit housing associations in England, nearly 65,000 people with disabilities will be at risk of losing their homes because of the change, including 5,000 with profound physical disabilities and mental health problems in ‘shared ownership’ schemes, who obtained ‘niche’ mortgages at higher rates on the basis of their entitlement to state support.9A">www.housing.org.ukA number of other organisations representing disability organisations have also expressed concern about the potential impact of the change.10
It is also important to consider the impact of the change cumulatively, together with other cuts announced in the emergency budget (eg, to tax credits, child benefit, and the annual uprating of benefits – see Bulletin 217), and the restriction of help with housing costs to 104 weeks for many JSA claimants from January 2009 (see article on p6).
A legal challenge to the use of standard rates under the Human Rights Act on the basis of a violation of Article 14 of the European Convention (non-discrimination), read with either Article 8 or Article 1 of Protocol 1, was rejected by a Commissioner in CJSA/232/2003 on the grounds that a standard rate was a proportionate response to legitimate policy aims. There may be scope for further legal challenges, however, under the Human Rights Act, on the basis of unlawful discrimination against groups who are more likely to be paying higher interest rates because of their circumstances – for example disabled people in shared ownership schemes. If you think you may have such a case, please contact our advice line.
Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.
- 1. Social Security (Housing Costs) (Standard Interest Rate) Amendment Regulations 2010 SI No.1811. The regulations take effect from the first day of the benefit week that includes 1 October for benefits paid in arrears, and the first day of the first benefit week on or after 1 October for benefits paid in advance.
- 2. para 7.1, Explanatory Memorandum to the Regulations
- 3. para 7.4, Explanatory Memorandum
- 4. Available from the DWP website
- 5. para 4.3, Explanatory Memorandum
- 6. paras 7.6 and 7.7, Explanatory Memorandum
- 7. Equality Impact Assessment: support for mortgage interest, DWP Welfare and Wellbeing Group, August 2010, available from 8. Section 5, Equality Impact Assessment and para 7.5, Explanatory Memorandum
- 9. ‘64,000 people with disabilities at risk of losing their home’, National Housing Federation press release, 10 August 2010, see 10. See ‘Disabled homeowners fear repossession as mortgage interest payments cut’, the Observer and www.guardian.co.uk, 5 September 2010