The DWP calculates entitlement to payment on a loan for a house by applying a Standard Interest Rate rather than the actual interest your client is paying, unless the rate falls below 5%. The standard rate is based on the Bank of England base rate plus 1.58%. The DWP rate will therefore rise and fall with the Bank of England rate and effectively 'track' accordingly.
However the DWP does not necessarily change its interest rate at the same time as the lenders. So what your client gets in benefits towards interest on their mortgage may be less than their actual interest rate.
Your client may therefore need to keep some money aside in case they need to top up the payment to their lender from time to time and to make sure your mortgage account does not get into arrears
ISMI is usually paid direct to the lender. Your lender charges interest every calendar month, however DWP pay interest 4 weekly in arrears. As a result your mortgage account will permanently be in arrears unless you take steps to prevent this. It is important to do so as mortgage arrears, no matter how they have arisen may jeopardise any future loan you may want.
It is recommended that you open a separate bank account into which ISMI payments are made and into which you pay the first months interest in advance of receiving ISMI. Any monthly top up that you need to make can also be transferred automatically into this account. A direct debit can be set up to transfer monthly payments from this account into the mortgage account thereby ensuring that arrears do not occur. Although this sounds complicated, it is easier to keep track of your mortgage account this way.
