R(IS) 14/01

Mr. M. Rowland	CIS/2760/1998 
28.6.00
Housing costs - “deferred interest” scheme - whether capitalised interest a qualifying loan
The claimant and her husband took out a loan when purchasing their home in 1990. Under the agreement, only part of the interest due on the loan was to be paid during the first three years. The lender then opened a secondary account, capitalising the interest unpaid during those three years and charging interest on that amount at the same rate as on the main loan.  When the claimant claimed income support in 1996, the adjudication officer decided that only interest on the primary loan was applicable as a housing cost, because only that loan qualified under paragraph 15(1) of Schedule 3 to the Income Support (General) Regulations 1987, as amended with effect from 2 October 1995.  The claimant appealed, claiming interest on the secondary account as part of her housing costs.  The tribunal dismissed the claimant’s appeal, treating the secondary account as a loan but deciding that it did not qualify because it was not taken out to defray money applied for the purpose of “acquiring an interest in the dwelling occupied as the home”.  The claimant appealed to the Commissioner.
Held, dismissing the appeal, that:
1.	only the primary loan was used for the purpose of acquiring an interest in the dwelling;
2.	the capitalised sum in the secondary account was to be treated as a loan;
3.	but, while the secondary loan may have been taken out for the purpose of enabling the claimant to afford to buy the dwelling, it was not taken out either for the purpose of acquiring an interest in the dwelling or for the purpose of paying off the primary loan or interest on that loan.

DECISION OF THE SOCIAL SECURITY COMMISSIONER
1.	This is an appeal, brought by the claimant with the leave of a Commissioner, against a decision of the Cheltenham social security appeal tribunal dated 20 August 1997, whereby, by a majority, they dismissed her appeal against a decision of an adjudication officer that interest on a capital sum of £8,475 was not allowable as a housing cost within her applicable amount for the purpose of calculating her entitlement to income support.  I held an oral hearing in Cardiff at which the claimant neither appeared nor was represented and the Secretary of State was represented by Mr. Huw James, solicitor, acting as agent for the Solicitor to the Departments of Social Security and Health.
2.	The claimant is a single parent, separated from her husband, who claimed income support from 18 November 1996.  In 1990, she and her husband had taken out a loan with Abbey National plc under what was called a “deferred interest” scheme.  £48,025 was lent for the purchase of their home and a mortgage account opened to which payments of interest were credited.  However, the claimant and her husband were not expected to pay the full interest during the first three years.  Instead, they were expected to pay 85% in the first year, 90% in the second year and 95% in the third year.  Only in the fourth year would the whole interest payments be made. Abbey National then opened another account, capitalising the deferred interest.  The capitalised sum was £8,475 and interest was charged on that sum at the same rate as on the main account.  The claimant’s husband ceased paying his share of the mortgage after the December 1996 payment.  The adjudication officer decided that the only interest allowable as a housing cost of the claimant was the interest on half of £48,025 until 31 December 1996 and then the interest on the whole of that sum thereafter.  The claimant appealed, arguing that the interest on the £8,475 should also be taken into account as she and her husband would not have been able to buy the house if they had had to pay the whole of the interest from 1990. Having outlined the facts and referred to paragraph 15 of Schedule 3 to the Income Support (General) Regulations 1987, the tribunal said:
“The majority of the tribunal came to the conclusion that the loan of £8,475 was not monies which were applied for the purpose of acquiring an interest in the dwelling. The loan was in effect a form of secondary financing.  Whilst not being completely on all fours with an arrears case, it was analogous to it.  What was happening in effect was that the building society or bank were voluntarily agreeing not to claim interest which they would otherwise be entitled to, and that as a result of this they were capitalising the interest arrears. The situation was therefore very similar to an arrears situation which had been built up involuntarily.
[The claimant] had indicated that they would have been unable to purchase the house had this scheme not been in operation.  She also indicated that at that time they were short of capital because the house required large sums of money spending on it in order to make it habitable.
The tribunal did not however feel that the secondary loan was taken out for the purposes of carrying out any of the repairs or other situations envisaged in 16.1 of the schedule which refers to such matters as loans specifically taken out for the purposes of carrying out repairs. The loan of £8,475 was taken purely to make life easier for [the claimant and her husband] at an expensive time when they just purchased a property.
The appeal is dismissed. Interest cannot be allowed on the capital sum of £8,475 being interest on a deferred interest scheme operated by Abbey National in 1990.
There was a minority view expressed by Mrs. Dimmer to the effect that she felt that the interest was allowable because it was interest on capital which had been borrowed for the purposes of acquiring an interest in the dwelling occupied as the home.”
3.	The claimant now appeals on the ground that the tribunal erred in holding there to be a secondary loan when, she says, there was merely a separate account.  It is also submitted that there is no reference in the regulations to interest on arrears not being eligible.  The written submission from the adjudication officer very properly draws my attention to CIS/3774/1997 which had been decided shortly before the submission was written in late 1998 but says that at that time consideration was being given to appealing against the decision and that, in any event that decision is distinguishable from the present case. In fact, the Chief Adjudication Officer decided not to apply for leave to appeal against that decision and Mr. James took a slightly different approach from that advanced in the written submission. He submitted that CIS/3774/1997 was not really distinguishable from the present case but he submitted that there had been a crucial change in the legislation and that I should, in any event, not follow the Commissioner’s reasoning in that case.
4.	In CIS/3774/1997, the claimant had taken out a “low start” mortgage.  There was a main loan of £40,000 for the purchase of the home repayable over 25 years at a variable rate of interest.  There was also a secondary loan of £2,400 repayable over the same term and at the same variable rate of interest as the main loan.  However, the first instalment on the second loan was not due until the beginning of the fifth year after the date of the agreement.  During the first three years, set amounts of the capital advanced on the secondary loan were paid into the current account from which the claimant made the payments due on the main loan.  Thus, although the full amounts were always due under the main loan, the amounts deducted from the current account were partly counterbalanced by credits from the secondary loan.  The overall effect was that the net costs to the claimant were reduced for the first three years and were increased from the fifth year.  At the time paragraph 7(3), (5) and (6)(c) of Schedule 3 to the Income Support (General) Regulations 1987 provided:
“(3)	...  in this paragraph ‘eligible interest’ means the amount of interest on a loan ...  taken out to defray money applied for the purpose of-
(a)	acquiring an interest in the dwelling occupied as the home; or
(b)	paying off another loan but only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off.
...
(5)	Where a loan is applied only in part for the purpose specified in sub-paragraphs (3) and (3A), only such proportion of the interest thereon as is equal to the proportion of the loan applied for that purpose shall qualify as eligible interest.
(6)	Where, under the terms of a loan taken out for a purpose specified in sub-paragraphs (3) and (3A), interest is payable on accumulated arrears of interest (whether or not those arrears have been consolidated with the outstanding capital), the amount of such interest shall be met under this paragraph as if were eligible interest but only in so far as it represents interest on arrears incurred during any period-
	(a)	... ;
	(b) 	... ; or
	(c)	where, under the terms or conditions on which a loan has been made, for an initial period of at least 2 years the whole or part of the interest on that loan is not, or has not been payable;
... and where head (c) applies only to the extent that interest is deferred and accrues further interest under the terms or conditions on which the loan is made.”
The Commissioner took the view that, for the purposes of paragraph 7(3) there was really only one loan because the transactions were a package and so the question that had to be determined was why the loan had been taken out.  The Commissioner said:
“21.	... Paragraph 7(3) ... defines the permissible purposes for a claim for income support.  Paragraph 7(5) deals with the situation where only part of the loan is applied for those purposes, so a view must be taken of the purpose or purposes.  While the possibility existed that the claimant might have used some of the funds earmarked to the subsidiary agreement for other purposes, there is no evidence in this case that that happened, or that anyone intended to happen, or that it was any part of the purpose of the claimant entering into the Low Start Mortgage.  I note also the finding of the tribunal [that there “was no requirement to use the loan to assist with the payment of interest on the advance of £40,000 although, clearly, it was intended for that purpose”].  I therefore find that there was only one purpose behind the loan.  This was for the claimant to acquire an interest in the house he bought as his home.”
5.	Schedule 3 was completely substituted with effect from 2 October 1995 (after the date of claim in CIS/3774/97).  The concept of eligible interest has gone and is replaced by the concept of qualifying loans.  The new paragraph 15(1) and (3) provides:
“(1)	A loan qualifies under this paragraph where the loan was taken out to defray monies applied for any of the following purposes–
(a)	acquiring an interest in the dwelling occupied as the home; or
(b)	paying off another loan but only to the extent that interest on that other loan would have been eligible interest had the loan not been paid off.
...
(3)	Where a loan is applied only in part for the purposes specified in heads (a) and (b) of sub-paragraph (1), only that proportion of the loan which is applied for that purpose shall qualify under this paragraph.”
That is plainly equivalent to the old paragraph 7(3) and (5). There is no equivalent in the new schedule to the old paragraph 7(6)(c). Had there been, the present claimant would have succeeded by virtue of that provision, as Mr. James accepted. Mr. James at first submitted that the revocation of paragraph 7(6)(c) without replacement showed that it was the intention of the legislature that a claimant should not receive income support in respect of interest paid on deferred interest and that the new paragraph 15(1) should be construed accordingly. However, the new paragraph 15(1) must plainly be construed in the same way as the old paragraph 7(3) and the old paragraph 7(6)(c) cannot be prayed in aid of the construction of the old paragraph 7(3) because the former provision was added by amendment only in 1990 and cannot have altered whatever meaning the old paragraph 7(3) already had.
6.	I accept Mr. James’ concession that, while there are differences between the scheme under consideration in CIS/3774/1997 and the scheme in the present case, they are not all material to the relevant part of the Commissioner’s reasoning. In particular, it seems to me that, although the capitalised sum in the second account was not described as a loan, the tribunal in the present case were right to regard it as being such.  There is no practical distinction between agreeing to allow payments to be deferred for a period and making a loan to enable payments to be made during that period.  In either event, the beneficiary is released from the practical effects of the obligation to pay during the period but has an extra liability at the end of the period.  This is really a point in favour of the claimant because, while it is true, as the claimant has submitted, that there is nothing in the new schedule about interest on arrears not being eligible, it is now only interest on qualifying loans that can be met through income support and, unless the £8,475 was a loan of some sort, I do not see how it can be, or can be part of, a qualifying loan under paragraph 15.  It also seems to me that the Commissioner was right in CIS/3774/1997 to treat the package as amounting to a single loan although it really does not matter whether there is one loan to be apportioned under the old paragraph 7(5) or the new paragraph 15(3) or whether there are two separate loans.  In the present case there was just as much of a package.  Furthermore, it seems to me to be obvious that in both cases the claimants embarked upon the schemes for the purposes of buying a home.  However, I do not consider that to be enough to bring the whole interest due under the package within the old paragraph 7(3) or to make the whole loan under the package a qualifying loan under the new paragraph 15(1).
7.	What was required under the old paragraph 7(3) was that the loan have been taken out to defray money applied for the purpose of acquiring an interest in the dwelling occupied as a home.  In CIS/3774/1997, the Commissioner appears to have found that condition satisfied in respect of the secondary loan because the claimant intended to use the money lent to pay the interest on the primary loan. I have some considerable doubts about that approach but, in any event, this is an aspect upon which the present case is distinguishable if it is necessary to distinguish it.  In the present case, the sum “lent” to the claimant was not for the purpose of paying interest on the main loan because the amount paid was reduced.  It was lent to enable the claimant to buy other things during the first three years of the agreement.  In those circumstances, it was not a qualifying loan under the new paragraph 15.  I would respectfully suggest that, in fact, the underlying purpose of the secondary loan in CIS/3774/97 was also to enable the claimant to buy other things because the point of lending money to pay interest on the primary loan was to release other funds that would otherwise have been applied for that purpose.  In reality in both cases, only the primary loan was used for the purpose of “acquiring an interest in the dwelling occupied as the home”.  The secondary financing may have had the purpose of enabling the claimant to afford to buy the home, but that is not enough.
8.	Accordingly, I am satisfied that the majority of the tribunal were right to hold that interest on the £8,475 could not be met through income support as a housing cost.  This may seem hard to the claimant but the lack of any provision in the new schedule equivalent to the old paragraph 7(6)(c) appears to be consistent with the other new elements in the schedule.  Where there may be some element of unfairness is in the lack of any protection for those, like the present claimant, who took out deferred interest mortgages before 2 October 1995.  However, if there is any unfairness, that must be remedied by the legislature.
9.	I dismiss the claimant’s appeal.

Date: 28 June 2000	(signed) Mr. M. Rowland
	Commissioner