Help! I’m a pensioner and interest-only mortgage prisoner

I retired last year and have my pension and pension credit. The government has offered to help with the interest on my interest-only mortgage, but no one I’ve asked can seem to tell me how it works.

I’m one of those mortgage inmates and my interest rate is already at 9.75 percent. If the government pays for that but also adds more interest, I won’t have much equity if I have to sell my house because the mortgage expires in about four years.

There is no information on whether I can stop the government assistance and pay what I borrowed when I sell the house, or if I have to start paying back once I stop the assistance, in which case I may have difficulty paying that and the mortgage, depending on what the interest rate is.

Any advice you can give me would be greatly appreciated.

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Steve Webb replies: I am sorry to read that as a ‘mortgage prisoner’ you have been faced with paying such high interest.

For the purposes of this answer, I’m assuming you’ve already explored other options that may be available to those stuck this way.

As far as the benefit system is concerned, you are right that as someone with a pension discount you may be entitled to help with the mortgage interest deduction. However, the help is extremely limited for reasons I will explain.

If you retired early and had a mortgage, you could have your mortgage interest payments (up to certain limits) paid in addition to your benefit.

However, the government has abolished this aid and replaced it with a system of repayable loans.

The system is known as ‘mortgage rate support’ and there’s more about it on the gov.uk website.

It works so that the government contributes to your mortgage interest costs if you have a certain benefit.

For those on retirement credit, help is available as soon as you submit your application, but for those on working age benefits, there may be a three to nine month ‘waiting period’ on benefits before you can get help.

Did you miss out on an AOW benefit if you were a widower?

This is Money columnist Steve Webb is urging elderly widows who may have missed a back payment when their husbands died to get in touch.

He wants to help people get money that is rightfully theirs, and find out if there’s a systemic problem that hasn’t been picked up in the government’s massive correction exercise for older women who were underpaid.

Find out if you may be affected and how to contact Steve here.

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The Department of Work and Pensions will then make a contribution to your mortgage which it will pay directly to your lender.

However, there are two main differences between the amount you actually pay and the amount they are willing to cover.

The first is that they only pay interest on the first £200,000 of a loan for people of working age and only on the first £100,000 for those, like you, who have a pension credit.

This means that if your mortgage balance exceeds £100,000, any interest on the extra amount will not be covered.

Second, DWP pays interest at a standard rate regardless of the interest rate you are currently paying.

The gov.uk website indicates that this rate is currently 2.65 per cent, although this is subject to change. This is of course only a fraction of the rate you currently pay.

These DWP payments to your lender go through and they keep track of how much they paid. Also, they charge you interest on the amount they paid on your behalf and the interest rate they charge is currently 3.03 percent.

Ultimately, upon sale or transfer of ownership of the property, the full loan amount plus interest will have to be repaid to the DWP.

Your initial mortgage lender has “first burden” on the proceeds from your sale, but DWP then takes its share of what’s left.

Compared to the old system of payments to cover mortgage interest, this is a much less favorable system, not least because you have to repay all payments that DWP makes for you with interest.

However, if your finances are extremely strained and you are struggling to meet your monthly payments, these DWP partial payments can benefit you in the short term.