A client is likely to have to give up work soon due to poor health. He's due to have his mortgage paid off by his parents within the next year (it will be paid directly to the morgage lender) but he doesn't know when yet. He's worried about what effect this may have on his IS, particularly if it's not paid off before he gives up work, but doesn't want to struggle on at work any longer than he has to. From what I've read so far the regs on this seem confusing and several colleagues have said it's a 'grey' area with conflicting caselaw. Obviously it would be best if the mortgage can be paid off before he claims IS but I'd like to be able to reassure him about what happens if it isn't! He's much more likely to give up work soon and look after himself properly if I can. Any advice would be much appreciated.
Thanks
Ali

If the parents pay the lender direct (it's their decision how they're going to do it, after all) I can't see how this will affect an IS claim, whether they do it sooner or later. Deprivation might only be an issue if they gave the money to their son with no strings and he elected to clear his mortgage with it, knowing what the IS capital rules are. Neither is the capital available to the son upon application - the parents can say no - they prefer to send it to the mortgage lender!

Jim

Thanks a lot for that. Ali

I am really perplexed by this, why pay off the mortgage? Why not either negotiate with the lender over the 39 week waiting period if the mortgage is post 1995, or at worst rely on parents to pay the mortgage until IS housing costs kick in, and most if not all of the interest gets paid from then on?

That way his parents are still free to use their money to help him in other ways should they need to

His parents want to pay off the mortgage for him and can afford to do so, (it's only about 40K). He will find it so much easier to give up work if he knows he no longer has this large financial commitment hanging over him. The mortgage was only taken out about 18 months ago, with his parents encouragement, and there's no way he'll ever be able to pay off any capital once he gives up work. I can't believe a mortgage lender will accept no capital repayments ever. His parents knew all along that he may not be able to stay in work and were prepared to help if necessary. He has a progressive degenerative condition which has unfortunately got worse much more quickly than expected. He wants and needs to have a reasonable standard of living once he gives up work and is living on ICB, IS, DLA and CTB and having no mortgage to pay will really help this. Your message seems to imply that it would be to his advantage to retain the mortgage, which confuses me. I feel it's very generous of his parents and if they can afford it, why not? Also how can his parents use their money to help him in other ways without falling foul of the income and capital rules for means tested benefits?

I have never had any trouble getting lenders to acdept interest only, and if they did not, there is nothing to stop his parents paying off the capital (direct to the lender) in the usual installments.

He can claim the interest from the DWP, and if his parents help him out in kind (as they are free to do) he would not fall foul of the capital rules.

They could also formalise the situation by putting money into a discretionary trust for him

Paying off a mortgage early often makes good sense: It reduces uncertainty about IS & housing costs (standard interest rates which may cause a shortfall, waiting periods, linking periods, non dep's deductions, eligibility of loan, excessive housing costs, etc), it saves a seriously ill person from having to worry about managing a mortgage and it can significantly reduce the overall level of debt and interest the borrower has to pay during the life of the mortgage.

However, payment to claimant while on IS I think could count as capital because it is not a regular payment (and potentially notional capital if then used it to pay off mortgage). While there is some caselaw about the creation of trusts in such situations (thus meaning the money does not belong to the claimant), it's best not to have to argue such points at this stage.

Payment made direct to lender is safer but CPAG Handbook has a word of warning on page 1033 that any element for mortgage interest can count as claimant's capital (depending on the amount of interest, if any, included in the early payment, this may not be a problem). Perhaps it's best to do this before claimant claims IS (could he delay his IS claim while his parents make the payment? I assume he would have IB and poss DLA?). But even then I can envisage that a DM might still think he has disposed of capital in order to claim IS, so I don't think that delaying a claim is entirely straightforward.

Other benefit efficient ways for parents to help out include payment in kind and regular payments for items other than food, ordinary clothing or footwear, household fuel, rent or rates and IS housing costs. This could include phone line rental, TV rental, mortgage capital, insurance, water charges, holidays, etc but they must be regular payments (see Para 15 Schedule 9 IS Gen Regs).

Another issue to consider is that if his housing costs were nil, would he then have excess income when he goes onto LT rate of IB? Unless he could get SDP because of DLA mr care, etc.

Thanks a lot for that. It's really useful.

If they decise to go ahead, then the payment should be made direct - not through the borrower -

If the mortgage is to be paid off early, get them to check the penalty clauses for early redemption - if for example it's three months interest for paying the entire sum off early, then by paying the majority of it (but not all), in one payment, and then the remainder with another at a later date, the 3 months interest should then be calculated on the lesser amount.
Also, some lenders had clauses about only being able to pay off so much capital in any 12 month period without incurring penalties.
Needless to say, all this is tucked away in the small (and I mean small) print. All these little clauses can cost the lender a fair amount if they aren't careful.

Good point - though if there are such penalties, many high street lenders will waive them in the type of circumstances described. If there are very unreasonable clauses (eg with disproportionate penalties), it may be possible to challenge their enforceability using the Unfair Terms in Consumer Contracts Regulations.