Deferred payment agreements
The establishment of the universal deferred payment scheme will mean that people should not be forced to sell their home in their lifetime to pay for their care.
By taking out a deferred payment agreement, a person can ‘defer’ or delay paying the costs of their care and support until a later date, so they do not have to sell their home at a point of crisis.
The draft guidance on deferred payment agreements covers:
- who to offer a deferred payment to
- the provision of information and advice before making a deferred payment agreement
- how much can be deferred, and security for the agreement
- the interest rate for the deferral and administrative charges
- making the agreement, responsibilities while the agreement is in place and termination of the agreement
- when a local authority must enter into a deferred payment agreement
- when a local authority may enter into a deferred payment agreement
- conditions relating to deferred payment agreements
Who should deferred payments be offered to?
In the 2013 Caring for our future: implementing funding reform consultation, a number of respondents suggested that the eligibility criteria for deferred payment agreements should extend to people in extra care housing and supported living.
There are circumstances where, during the care planning process, it is agreed between the local authority and a person that the best way to meet their needs would be in these types of accommodation. In principle we agree that deferred payment agreements should enable these people to access the care they need without having to sell their home. We need further evidence of how many people may fall into this category to understand better the likely scale and costs of this extension.
Respond to question 30 below.
During the legislative passage of the Act we added in a new section 36 to allow deferred payment agreements to be offered in a manner that would make them compliant with Sharia law. There were mixed views in response to the consultation as to whether it was necessary to enact this or not and as such we have decided not to enact it for April 2015.
We will keep under review whether a Sharia compliant scheme may be needed in future and would welcome further views now that the detail of the scheme has been developed.
Respond to question 31 below.
How much can be deferred?
When agreeing how much a person can defer they, with the local authority, need to consider the maximum amount that can be deferred – the ‘upper limit’. We have suggested that this is usually a maximum percentage of the value of someone’s home, a loan-to-value (LTV) ratio. Drawing on similar situations where debts are secured against a property, such as mortgages and equity release, we have suggested that this should be between 70% and 80% of the value of the property. Further sensitivity analysis needs to be conducted to assure the final value.
In combination, the maximum amount deferred, the interest rate and the security required will govern how much financial risk local authorities are exposed to and so all three need to be balanced against each other. As well as providing security against risk, these three factors will also have a key role in determining how generous the scheme is to people within it.
For example, choosing a lower LTV ratio would likely mean that the interest rate could be lower and therefore cheaper for people but it would also reduce the amount that each person could defer as a maximum.
Sometimes people may want or need to defer more of their fees than they would be able to if the LTV was rigidly applied, for example where they have a low value home or they have a very low income. Local authorities will have the discretion to allow people to defer more than the maximum LTV and up to the full sale value of the home minus the lower capital limit (currently this is £14,250). This will help to prolong the deferred payments scheme for as long as possible where people need it for longer than normal.
Respond to question 32 below.
Currently the deferred payment scheme offers very little incentive for people to rent, and as a consequence scheme rental rates are low. This increases the risk that the scheme will lead to more empty homes, which we are keen to mitigate as far as possible. We therefore want to incentivise people with a deferred payment agreement to rent out their home.
As well as the economic benefits, this will have several benefits to the people involved. It will mean increased income for the owner of the home and could also decrease the cost of insuring it and it is likely to also mean that the home is routinely maintained to high standards and so ensure the property maintains its values. For local authorities, they will be able to collect council tax from the tenants.
A way to incentivise a greater number of people with a deferred payment agreement to rent out their property would be to allow them to keep a proportion of their rental income on top of their disposable income allowance. This would not alter the amount that a person would be charged for their care – and under the charging framework, the additional income would be taken into account.
The proposal is that within the deferred payment scheme, a person would be able to defer more rental income than other income and so keep more income, giving them greater flexibility over their assets.
Respond to questions 33 and 34 below.
Local authorities are required to obtain adequate security when entering into a deferred payment agreement. This is to ensure they are not exposed to undue financial risk. Where local authorities are required to enter into a deferred payment agreement they must accept a legal charge on a property as adequate security.
We have proposed that to maintain the generosity of offer, local authorities must be prepared to accept any charge on a property, not just a first charge. First charges would be more secure, however it would mean that people with outstanding mortgages who otherwise meet the criteria would not be entitled to a deferred payment agreement. This felt unnecessarily restrictive.
Respond to question 35 below.
Interest rate and administration charge
From April 2015, local authorities will have a new power to charge interest on deferred payment agreements. This is designed to be affordable to people within the scheme and not a means for local authorities to generate profit. It is designed to cover the risks to the local authority, for example of default, and to cover the cost of lending.
The final interest rate will need to reflect final decisions on the LTV rate and the security that is required and the actual cost of borrowing at that time. Subject to these decisions, based on current basis, we have suggested that the interest rate is likely to be between 3.5% and 5%.
Respond to question 36 below.
The risks and possible costs to local authorities will differ between those deferrals that a local authority is required to offer and those deferrals that a local authority has a discretionary power to offer.
In order to keep the interest rate low for people in the mandatory scheme, regulations could specify a different interest rate for the two types of deferred payment agreement. If this were the case, local authorities could be given the discretion to decide what the interest rate for a discretionary deferral should be locally and so better reflect individual risk. A maximum interest rate above which they could not charge would still be specified in regulations and this would likely be higher than that specified for the mandatory scheme.
Respond to question 37 below.