Mortgage lenders have urged the Government to pay Support for Mortgage Interest (SMI) to match the rates which borrowers are actually on.
Currently, the benefit is paid at a flat rate determined by the Bank of England's average mortgage rate – currently 3.63%.
However, the Council of Mortgage Lenders (CML) has said that this payment is, in most cases, likely to differ from the actual rate payable on people's mortgages.
The body believes that it would be 'fairer' and potentially cheaper for the Government to pay the benefit to borrowers at the rate payable on their individual mortgages.
"That would lessen the problem of some borrowers facing a shortfall because the benefit does not cover their interest payments in full, while others have their mortgages overpaid by the state," said the CML.
Analysis shows that the Government could make savings of around £26 million a year by paying benefits in this way.
Applying a cap of 1.5% above the current interest rate could take savings up to £40 million.
The CML will present its arguments to the Department of Work and Pensions (DWP) which recently called for evidence on SMI, where it will encourage the Government to keep the current limit of £200,000 for qualifying mortgages and the 13-week waiting period until people are entitled to receive the benefit.
It will also say that it broadly disagrees with a proposal to pay SMI to those on benefits for them to then pay to their lenders, in a bid to encourage those on benefits to take greater responsibility for their financial affairs.
The CML said the existing system, whereby benefits are paid directly to lenders, 'minimises the risk of the benefit not being used for its intended purpose'.
"If the Government decides to dispense with the Mortgage Interest Direct scheme – in pursuit of its wider policy objective of encouraging benefit recipients to take greater responsibility for their financial affairs – we believe there is an increased likelihood that recipients will fail to meet their mortgage payments," said the body.
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