Almost 140,000 low-income households are being warned the help they get with their mortgages will be axed within months unless they sign up to a new loan with the government.
Letters with application forms are being sent out to 65,000 pensioners and 70,000-plus people who receive benefits.
If they fail to comply, they will lose help with their mortgage in April next year and could face repossession if they get into arrears as a result.
But, mutual insurer Royal London says the letters are not clear about the interest rate for what is, in effect, a “second mortgage”, and recipients are getting little help in making an informed decision.
Support for Mortgage Interest (SMI) is paid to homeowners in receipt of certain income-related benefits such as Jobseeker’s Allowance (JSA) and Pension Credit.
It pays the interest on mortgages and some home improvement loans on your behalf straight to your lender.
Those who qualify for SMI get help paying the interest on up to £200,000 of a mortgage; for those receiving Pension Credit, this figure is £100,000.
Up until April 2018, it has been paid as a free benefit but after this point any SMI payments will need to be repaid to the government plus interest when the property is sold.
Helen Morrissey, personal finance specialist at Royal London, said axing this represented a “massive policy shift”.
She said the onus was on the government to ensure people received the advice needed on whether or not to take out a “second mortgage” to pay for this.
“Instead, thousands of people are getting letters which miss crucial details such as the interest rate on the mortgage,” Morrissey said.
“The government is pointing people in the direction of the Money Advice Service and Citizens Advice but they can only provide guidance as opposed to tailored advice.
“Some people will find the process too daunting and will lose their mortgage help next April, with a risk of repossession.
“Others will sign up, but this will make it even harder for those with interest-only mortgages to clear their outstanding balance at the end of the mortgage.”
Royal London believes the rate will be around 2.2% but that could rise in line with interest rates.
Of particular concern is the potential impact on those SMI recipients on Pension Credit who have interest only mortgages stretching into retirement.
Royal London analysis shows that a Pension Credit recipient receiving the average weekly SMI payment of £20 could run up a debt of £5,552 if they claim SMI for five years, which is the typical claim duration for pensioners. If they were to claim it for ten years then the loan amount would stand at £11,744.
Once the mortgage term ends they face the prospect of having to repay the SMI loan as well as the outstanding capital sum on their mortgage.
A DWP spokesman said: “This reform means we will continue to provide a safety net to help homeowners avoid repossession.”