Support for homeowners unable to work is not rising in line with higher interest rates.

Government failure to provide support for struggling homeowners will trigger a “tsunami of repossessions” which will damage house prices, experts have warned.

Measures to help homeowners on benefits have failed to match the Bank of England’s six consecutive increases in interest rates since the end of last year.

The issue relates to the “Support for Mortgage Interest” payment which helps homeowners unable to work cover the cost of their loans.

The SMI rate has remained fixed at 2.09pc since April 2021 while some recipients have seen mortgage costs dramatically increase since December – and face a growing risk of defaulting.

Some 13,000 homeowners receive SMI and wide scale repossessions would pose a major risk to house prices, experts said.

If all of these people lost their homes, that would equal the number of repossessions in 2018 and 2019 combined.

Sophie Evans*, 54, lives in the Midlands and has a £107,000 interest-only mortgage on a tracker deal. Her mortgage rate has nearly doubled from 2.26pc to 4pc as the Bank Rate rose and her bills have become unaffordable.

Ms Evans is disabled and cannot work and so receives SMI, which largely covered her mortgage until this year.

Her monthly mortgage bill has jumped by 80pc to £360 and she now needs to find £170 per month to avoid defaulting – around 12pc of her income.

She said: “It hurts, especially when all the other bills are going up. I am worried that I will face repossession. Being disabled, I don’t know what else I can cut back.

“There will be so many people getting into arrears. There will be a tsunami of repossessions.”

This will combine with more organic repossessions driven by rising unemployment and bring down house prices. 

Andrew Wishart, of Capital Economics, a research firm, said: "We now forecast that the unemployment rate will rise from 3.8pc to over 5pc, which will push up repossessions, though they should remain well below the levels reached in the house price crashes of the early 1990s and 2008." Capital Economics has forecast a 7pc house price drop over the next two years.

‘We will see people lose their homes’

SMI is pegged to the Bank of England’s monthly average mortgage interest rate and is adjusted when it changes by 0.5 percentage points. However, this rate is skewed by most borrowers having fixed rate deals and so it responds very slowly to changes in the Bank Rate.

The average mortgage rate has only risen from 2.02pc in November to 2.11pc now, despite the Bank Rate rising by 1.65 percentage points. The average fixed-rate deal is just 1.91pc so is covered by SMI. Even at the end of June, however, those on floating rates, such as Ms Evans, were paying an average of 3.21pc. Rates have gone up even further since then.

Sarah Olney, a Liberal Democrats MP and Treasury spokesman, said the Government must introduce an emergency mortgage support fund.

She said: “We will see people losing their homes, and that will happen quite quickly.

“There is a threat to the housing market and those people who scraped together to buy at the top of the market are the people who will be hit hardest.”

Those who receive SMI face a double hit. In 2018, SMI changed from a payment to a loan, which charges interest at 1.4pc – up from 0.8pc earlier this year. Since this change, Ms Evans has built up £11,500 of debt. Ms Olney called on the Government to reverse the 2018 change.

A Government spokesman said: “We recognise people are struggling with rising prices which is why we are protecting the eight million most vulnerable families with at least £1,200 of direct payments this year, with a £150 top-up payment for disabled people.”

Homeowners struggling with their mortgage payments should speak to their lender, who is obliged to consider offering tailored forbearance under, he added.

Properties suffer ‘down valuations’ as banks fear house price falls

Banks and surveyors are “down valuing” as many as half of homes in some parts of the country amid fears sharp house price falls are on the horizon.

Home buyers have been left scrambling for cash as lenders have refused to grant mortgages big enough to cover the agreed sales price. Experts said banks were concerned the cost of living crisis would cause the end of the post-pandemic property boom.

Anthony Harris, of Continuum, a financial advice firm which manages over £1.53bn in mortgages and other assets, said: “I am seeing more than 50pc of purchase applications being down valued at present.”

This level is likely to rise further, he added. "Sellers are asking high prices and there always seems to be more than two buyers who are prepared to enter a bit of a bidding war, pushing up prices further. But the lenders’ surveyors are not supporting the prices agreed."

When surveyors do not agree with the buyer and seller’s valuation of the property, the home is down valued. The prospective buyer must then pay the difference between the valuation and the agreed sales price in cash, or risk the purchase collapsing.

Mr Harris said a couple buying their first home in Berkshire had to find an extra £30,000 in cash. They had agreed to pay £430,000 for their property but their lender valued the home at £400,000. Another family buying a house in West Sussex agreed to pay £470,000 but had to find a further £20,000 after their high street lender down valued the property to £450,000.

Adrian Anderson, of Anderson Harris mortgage brokers, said: "I expect mortgage valuers will start to be more conservative moving forwards. The heat is coming out of the market and buyers are being a bit more restrained because of rising mortgage interest rates and the cost of living crisis.”

Official figures released today show property transaction levels are slowly returning to pre-Covid levels as the rising cost of living cools the housing market – but experts warned there would be a steep decline in the months ahead.

There were 110,970 home sales in July, according to HM Revenue & Customs. This was 7.2pc higher than in June and 2.6pc above the five-year pre-Covid July average. However, experts said these figures reflected purchases that were agreed several months earlier.

Jeremy Leaf, a north London estate agent, said: “The market has moved on. Demand is still there but concerns about the rising cost of living and interest rate are prompting a more cautious approach.” 

In the months ahead, transaction figures are likely to more clearly reflect the fact that runaway inflation, rising interest rates and soaring energy bills are hitting affordability, experts said.