MORTGAGE INTEREST RATE

HC Deb 17 March 1969 vol 780 cc42-50

Mr. Peter Walker

(by Private Notice) asked the Chancellor of the Exchequer what action he proposes to take following the announcement of the Building Societies Association that they are going to increase the mortgage interest rate.

The Chief Secretary to the Treasury (Mr. John Diamond)

The Government have considered the decision of the Building Societies Association last Friday to raise their interest rates. The hon. Gentleman's Question has given me an opportunity to explain the background.

In the last few months rates of interest on other short-term media which compete with building society shares and deposits have substantially increased. This increase reflects not just tighter monetary conditions in this country, but a substantial upward movement of international interest rates, from the effects of which we cannot insulate ourselves.

Representatives of the Building Societies Association came to see me on Thursday, 13th March, when it had become clear that there was a possibility of their deciding the following day to raise the recommended investment and mortgage rates. I reminded them that any decision on rates should be related to their own position and requirements, not just to changes in other rates of interest. They told me that their monthly net intake of funds, which had been falling steadily since November, had declined further in February.

Their experience had been particularly difficult in the second half of the month, and they were concerned lest the trend should deteriorate still further. They stated that if they were not able substantially to improve upon the February figure in the coming months, they would be unable to maintain a satisfactory rate of mortgage lending.

While the decision whether and when to alter the recommended rates is the responsibility of the Council of the Building Societies Association, the Government have to decide whether the increase should be referred to the National Board for Prices and Incomes. In view of the considerations I have mentioned, it has been decided not to make a reference. The Association's representatives were able to assure me that societies would be concerned to avoid immediate hardship to existing borrowers, and would be willing wherever possible to extend the period of repayment rather than increase monthly installments.

The Government will carefully watch the position to ensure that the societies lose no opportunity that a general fall of interest rates may present for lowering their own rates. At the proper time the Government will again consider the question of a reference to the Board with a view to re-examining how far the improvements recommended by the Board two years ago are being carried out and whether the building society movement is sufficiently flexible in its response to the downward movement of rates.

Mr. Walker

Does the right hon. Gentleman realise that his Answer amounts to saying that the Government intend to take no action whatever to relieve the problem of people with mortgages? Will he confirm that the Government have today announced that the interest rate on money for the local authorities for house purchase loans is to be increased to 9⅛ per cent.? Will he immediately revise the option mortgage scheme, since the failure of that scheme is shown by the fact that 90 per cent. of people with mortgages refuse to take advantage of it?

Is the right hon. Gentleman aware than an 80 per cent. mortgage on the average price house now results in payments of £2 10s. a week more than when Labour came into office? In the light of what the Prime Minister said in his election manifesto, at Bradford, at Sittingbourne, at Huyton and at Stevenage, and at a time when—[HON. MEMBERS: "Ask a question."]—at a time when the mort gage interest rate

Hon. Members

Speech.

Mr. Speaker

Order. Both sides must listen to observations with which they do not happen to agree.

Mr. Walker

As the Prime Minister undertook, at a time when the mortgage interest rate was 6 per cent., that he would lower that interest rate, should not the people be allowed to decide on the Prime Minister's deceit over this issue?

Mr. Diamond

I shall answer the hon. Gentleman's request for information.

As regards the option mortgage scheme, it is still true that those who pay at the second band, though not at the standard rate of tax, have a continuing advantage as a result of the option mortgage scheme.

As regards the local authority rate, the hon. Gentleman was good enough to confirm what I was saying, that local authority rates, which to a large extent depend on Euro-dollar market rates which have gone up no less than 2 per cent., have increased and, as a result, as they compete with building society rates, the building societies have to increase their rates to attract funds.

As regards mortgage repayments, the hon. Gentleman asked me to confirm a particular figure, but he did not say what the amount of the mortgage was.

Mr. Dickens

Will my right hon. Friend go back to the Association and invite it to reconsider its decision pending two proposals: first, that societies should henceforth, when granting new mortgages, take out a 10 per cent. equity in the value of the property concerned; and, second, that they should make much better use of their massive reserves, with the Government, perhaps, underwriting investors' funds in some societies?

Mr. Diamond

My hon. Friend's first point raises a matter for the societies which would require very careful thought. Second, my hon. Friend speaks of the societies making better use of their reserves. I do not know whether he was referring to the question of the liquidity ratio, upon which the Prices and Incomes Board and the Hardie Committee commented. Their comment was that they thought that societies were, on average—I repeat "' on average "—carrying too large a liquidity ratio. When one looks into it, one find that the figures vary enormously as between different sizes of society and between different societies in the same size group.

Mr. Murton

I remind the right hon. Gentleman that this is the fourth time that mortgage rates have risen since there has been a Labour Government? As a man now borrowing £5,000 over 25 years must have a minimum salary of £2,000 a year, how can any worker in an industrial job hope ever to achieve home ownership?

Mr. Diamond

The representatives of the societies inform me that there is no difficulty in using their funds, that is to say, there is a queue of borrowers anxious to pay the going rate. The experience of borrowers hitherto has been that the interest which they have paid in full has been more than covered by the increase in the value of their houses.

Mr. Bidwell

Does my right hon. Friend recognise that this alarming increase in mortgage interest rates will cause considerable dismay to large numbers of our Labour supporters, and will he agree that, since the option mortgage scheme has an element of subsidy for the societies in any case, the Government should increase their subsidy, taxing the wealthy to do it?

Mr. Diamond

The Government are not at present of the opinion that there is any call for further subsidisation, but these matters are, naturally, kept under review.

Mr. Sandys

Will the right hon. Gentleman answer the last part of the question put by my hon. Friend the Member for Worcester (Mr. Peter Walker), about election pledges, and, in particular, say how this squares with the promise given by the right hon. Member for Belper (Mr. George Brown) that home loan rates would be reduced to 3 per cent.? Does it not show, once again, that Labour government does not work?

Mr. Diamond

My right hon. Friend has many times denied the accuracy of that reported remark.

Mr. George Brown

I have been waiting for that. May I make clear that, as has been said many times, the Sunday Express made a lie? No such promise, no such announcement, was ever made. While I think that we could have had lower interest rates, the right hon. Member for Streatham (Mr. Sandys) must recognise that the policy of his party, equally with the policy of ours, ruled that out.

Mr. Lubbock

Does the right hon. Gentleman recall that only a few weeks ago the Minister for Planning and Land was forecasting what he called a crude surplus of 1 million houses over households by 1973? What difference does the right hon. Gentleman estimate that this large increase in the mortgage rate will make to the efforts of private builders up to 1973, and to what extent will it mean that the number of houses falls short of the forecast made?

Further, in view of the grave difficulties under which building societies are now working, will the Chief Secretary represent to his right hon. Friend the Chancellor that they be relieved of Corporation Tax in the forthcoming Budget?

Mr. Diamond

May I deal, first, with the second part of the question? I will convey the hon. Member's comments to my right hon. Friend. I was asked about the forecast of the housing programme. The fact is that if building societies were not able to attract funds and thereby to lend, there would be a considerable danger that the private sector of the housing programme would not be completed. It is expected that this increase will, broadly, enable that to take place.

Mr. Roebuck

Will my right hon. Friend ignore the partisan irrelevancies from the Conservative Party, which has never been on the side of the owner-occupier, and consider that many people buying homes on mortgage do so as a means of saving for their old age? Will he take that into consideration when he is assisting the Chancellor in framing his Budget so that these people may be encouraged to buy their own homes? In connection with that, will he consider exempting building societies not only from Corporation Tax, but also from Selective Employment Tax?

Mr. Diamond

Again, in a matter of taxation, I will do no more than say that I will pass the suggestion on to my right hon. Friend.

Mr. Boyd-Carpenter

In view of the tragically high figure which Government policy has forced on building societies, may I ask the Chief Secretary whether he is not aware that it is particularly tragic that the Minister of Housing should at this moment have cut savagely the amount of money available to local authorities in London for loans on house purchase? In view of the Government's pledges about helping the home owner, will he not at least reverse that policy?

Mr. Diamond

My right hon. Friend heard attentively what the right hon. Gentleman said. The right hon. Gentleman is, of course, aware that the G.L.C. did not use its quota last year.

Mr. Alfred Morris

Is my right hon. Friend aware that there is some disappointment that this decision has not been referred to the National Board for Prices and Incomes? Can that policy be reconsidered or will my right hon. Friend at least go more fully into the reasons for not referring the decision to the Board?

Mr. Diamond

Yes, with pleasure. I share my hon. Friend's concern. The reasons are, first, that a reference was made to the Board a little over two years ago when the matter was fully considered by the Board. Secondly, if the decision were referred to the Board, there would be a period during which the Board had to examine the position, and the building societies took the view, which I accepted from them, that during that period there would be considerable anxiety about their intake of funds. Although we are anxious to keep the cost down, we are also anxious that there should be no interference with the programme of house-building.

Mr. Edward M. Taylor

Does the Minister recall the specific pre-election pledge by the Prime Minister that by an intelligent monetary policy Labour would bring mortgages within the reach of young couples living on average incomes? In view of the staggering new figure of mortgage rates and the hardship which will arise from them, will he at least give an assurance that no further burden will be put on societies by way of the Income Tax which they have to pay?

Mr. Diamond

All the evidence which the societies have brought to my attention indicates that young married couples with average incomes are anxious to enter into new mortgages.

Mr. Murray

Will not my right hon. Friend reconsider two points on this issue? One is the possibility of widening the scope of the option mortgage scheme? Secondly, it would help people who have mortgages and who will be hard hit by this increase if he would refer the increase to the National Board for Prices and Incomes, so that all the facts are shown to them.

Mr. Diamond

I bear in mind what my hon. Friend said. He will have heard in my opening answer that a reference to the Board later may become appropriate for the reasons which I gave.

Mr. Gordon Campbell

How can the Government reconcile what the Minister said today with what the right hon. Member for Belper (Mr. George Brown) is reported in the Press to have said on 26th September, 1964—"What we have in mind is something like 3 per cent."—and with what he said a year later at the Erith by-election—that the Government were bringing in proposals to that effect?

Mr. Diamond

I have answered that question. I have told the House that my right hon. Friend the Member for Belper (Mr. George Brown) denies having made that statement—and he has just repeated that denial.

Mr. English

Will my right hon. Friend, at least internally, advise his Department that the time has come to cut the flummery and to understand that we should not rely only on internal interest rates, but that it might be appropriate to allow the £ to float?

Mr. Diamond

That is a very wide question indeed.

Mr. Frederic Harris

As this increase is the natural outcome of the development of Government economic and financial policies over the last few years, how can the Minister say to young people that they can take out mortgages? They are anxious to take them out, but they are physically unable to do so. Does he realise that old people who have mortgages think it a fraud that they should be put in this position?

Mr. Diamond

I have fully answered the first part of the question. I have already stated that there is a queue of young people anxious to borrow the funds. If the funds do not increase, the length of the queue will increase. One has to maintain a reasonable balance in the private housing sector.

Mr. Paget

Does my right hon. Friend agree that while taken in isolation these figures will be intolerable, taken in conjunction with the level of inflation which is running they represent a most attractive rate to borrowers? Will he further agree that maintaining the currency by a rate of interest which makes inflation a social necessity is rather an odd way to run the economy?

Mr. Diamond

It is certainly the case that the rates now being charged by building societies compare favourably with the rates at which first-class companies have to borrow money for their business purposes. That is a possible comparison.

Several Hon. Members

rose—

Mr. Speaker

Order. I must protect the business of the House. Mr. Marten.