OPTION MORTGAGES

HC Deb 06 November 1973 vol 863 cc941-55

10.12 p.m.

The Minister for Housing and Construction (Mr. Paul Channon)

I beg to move, That the Assistance for House Purchase and Improvement (Increase of Subsidy) Order 1973, a draft of which was laid before this House on 31st October, be approved. The House has devoted the whole of today to debating problems of housing and land, and I do not think the House will expect me to deal with this order at any great length since it arises from a precedent set down by one of my predecessors some years ago. Therefore I shall introduce the order briefly since it has as its sole purpose the object of continuing to give similar help to option mortgagors so that they may receive equivalent assistance towards their mortgage payments as those who receive full tax relief.

The House will be aware that Part II of the Housing Subsidies Act 1967 was designed to give the lower income house purchaser the possibility of assistance through an interest-related subsidy equivalent to the help which the better-off purchaser can get through tax relief at the standard rate on full mortgage interest. The subsidy is available in lieu of tax relief to any house purchaser irrespective of income.

The House will also wish to be reminded that there are two rates of subsidy. One is for repayment mortgages, which involve periodic repayments of capital as well as interest, so that the capital is repaid over the life of the loan by instalments. The other is for endowment and similar mortgages which involve payment of interest only during the life of a loan and repayment of capital in a lump sum on termination. The subsidy scale is slightly lower for endowment mortgages to ensure that—bearing in mind that payments on such mortgages consist of interest only—about the same proportion of the interest-related subsidy is payable on both types of mortgage.

When the 1967 Act was enacted it provided in effect for a fiat rate of 2 per cent. subsidy for the ordinary repayment mortgagor at a time when the mortgage rate recommended by the Building Societies Association was 7⅛ per cent. But the recommended rate had risen to 8½ per cent. by March 1969 and by then the option mortgagor was significantly worse off than the house purchaser eligible for full tax relief on mortgage interest.

In the circumstances prevailing the then Government amended the 1967 Act to enable the level of subsidy to be varied by order. There were increased rates of subsidy to take account of the higher level of mortgage rates. The scale of subsidy laid down in the 1969 order provided for increases in the subsidy rate of ¼per cent. for each increment in the mortgage rate of ⅞ per cent. above 7 per cent. The purpose, as I interpret it, was that option mortgagors would continue to get about the same proportion of assistance as mortgagors eligible for full tax relief on mortgage interest at the standard rate.

However, the subsidy scales prescribed in the 1969 order cut off at interest rates in excess of 9⅝ per cent. Given that these scales are related to increments of ⅞ per cent. in the mortgage rate, it means that the 1969 order covers mortgage rates up to 10½ per cent.

As the House knows, mortgage rates have unfortunately increased. Therefore, in fairness to option mortgagors the subsidy scales must be increased. This is what the draft statutory instrument does. It provides for an extension of the option mortgage scales embodied in the 1969 order to cover mortgage rates in the 11 per cent. bracket. Under the 1969 order an option mortgagor with an ordinary annuity mortgage qualifies for a 3 per cent. subsidy. Under this draft order his subsidy would go up to 3¼ per cent. This will restore equality of treatment between the option mortgagor and the mortgagor eligible for tax relief at the basic rate of 30 per cent. on full mortgage interest. I could give examples but, in the interests of saving time, I will not do so unless hon. Members wish.

The House will note that, as in the 1969 order, the new draft order provides for two scales of subsidy, one for repayment mortgages and one for endowment and similar mortgages. In the same way as in the 1969 order, the increased rates of subsidy will come into effect on 1st January. This follows the precedent set on an earlier occasion. This will give the lenders, who have been consulted, time to make the necessary administrative arrangements. As Lord Greenwood, as he now is, pointed out in the earlier debate, it also conveniently coincides with the first day of the financial year for many building societies.

I hope that the order will be generally welcomed as it restores equality of treatment between the option mortgagor and the mortgagor eligible for tax relief at the basic rate on full mortgage interest. I think it would be the general wish of the House that the option mortgagor should continue to receive this full relief. Therefore, I hope that hon. Members on both sides of the House will approve the Assistance for House Purchase and Improvement (Increase of Subsidy) Order.

10.18 p.m.

Mr. Reginald Freeson (Willesden, East)

I must congratulate the Minister on being able to introduce the order without more than once mentioning the somewhat magical figure of 11 per cent. We welcome the order for the purposes described by the hon. Gentleman. But let there be no mistake: the introduction of the order is a confession of failure by the Government. It is one more admission that they have broken their election promise to make home ownership easier again" and to keep house prices down". Moreover, the order makes it clear that the Government assume that interest rates will continue at their present high level and may go even higher. If I am wrong, perhaps the Minister will tell us whether he expects mortgage rates to drop below 10 per cent. in the near or medium future. Or does he endorse the fears expressed by many in this House and outside that 10 per cent. is a floor below which we shall never drop again in this respect.

This is very different from what the Government were telling the building societies earlier this year. They then pleaded that interest rates would drop by this autumn—about now—so that in the Government's view the 10 per cent. that the building societies were considering introducing was quite unjustified. Now, however, we have 11 per cent. It is clear from the order that the Govern- ment expect this situation to remain with us for quite a while to come, contrary to their clearly expressed views to the country, and particularly to the building society movement, earlier in the year. If I am wrong, I will gladly give way to the Minister so that he may assure us to the contrary that the Government expect these rates to fall in the near future.

The variation that the order makes is the result of interest rates having risen since 1970 from 8.5 per cent. to 11 per cent. It will give some help to house purchasers, and we welcome this, but, we may well ask, how much help? The Minister has not given the numbers of people who are or might be involved. I realise that there is some difficulty in this, although a broad estimate could be given on the basis of past experience. I believe, for example, that the present rate of take-up of option mortgages is about 23 to 24 per cent. of all building society mortgages and a similar proportion among local authority mortgages. I do not know the figure for endowment mortgages and the like.

In June 1970 the cost of the average new house was £5,082; today it is £10,023. The average price of a second-hand house has risen from £4,778 to £9,790. Three years ago a man with an 80 per cent. mortgage repayable over 25 years had to put down a deposit of £1,016 on a new house and £956 on a second-hand property. Each month he paid back just over £23 and £22 respectively after tax or subsidy relief. Today, in the light of the situation dealt with by the order, the average purchaser, faced with a new house cost of over £10,000, will have to pay back each month over £57 and for a secondhand house over £56. The deposits required are double those of three years ago—over £2,000 for a new house and just under that figure for a second-hand house.

With average earnings of £40 a week, how many additional people at the lower end of the income scale will this measure help? We are entitled to have some idea of what is in the Government's mind.

Although the order brings some small additional help, it is clear that the house price and mortgage situation has gone so far through the roof that something much more radical will have to be done to achieve equity in—

Mr. Speaker

Order. The House is in a certain difficulty. We cannot have too wide a debate. Some of the matters to which the hon. Gentleman has referred are relevant in so far as they are factors in making the revised rates necessary. I do not think that he can, under this order, launch into a general debate.

Mr. Freeson

I accept your ruling, Mr. Speaker. I appreciate that it is difficult for us always to follow the narrow path when making relevant points. I will content myself with saying that this kind of situation which we have experienced in the last two years and of which we see the results today in terms of price and of mortgage restraints imposed on people with moderate incomes—whom the order and the scheme are supposed to help—shows that whatever variation in assistance is achieved by the order will not be enough to secure the objectives of the scheme, which are to help people at the lower end of the income scale with owner occupation. It is clear that that can no longer be achieved.

Although we welcome the order, because it keeps things in line, much more radical measures will have to be taken to achieve equity and see that help goes where it is most needed, which was the object of the scheme when it was introduced. We on this side have given some thought to that problem. We intend so to extend and reshape the scheme as to turn it into a universal mortgage scheme which would bring about equity as between the well-to-do and the poorer owner-occupiers, reducing the help going to the richer and increasing the help going to the poorer. That would be possible. We have a feasible scheme, and I hope that it will not be long before we can introduce it.

10.26 p.m.

Mr. R. A. McCrindle (Billericay)

I rise to make a brief intervention as a strong supporter of the option mortgage system. I have supported it since its introduction, because it has assisted many people whose income would otherwise be insufficient to enable them to purchase their own house. But rising interest rates over the past few years have largely eroded the advantage extended to owner-occupiers by the system.

The order does something to restore the previous situation, but it perhaps does not go far enough if we are to continue encouraging the development of what we on this side have described as a property-owning democracy, which includes ownership by those who in all other circumstances would find it difficult to purchase their own houses.

One of the aims of the option mortgage system should be to extend to those who are eligible an assurance that their housing budget will be comparatively steady. Over the past few years, particularly the past 18 months, that has become demonstrably more and more difficult.

I hope that I shall not be going outside the bounds of order if I refer to a rather wider section of owner-occupiers, those who are not now within the option mortgage system but who, having bought their properties about 18 months ago, with the benefit of tax relief, are finding considerable difficulty in meeting their increased mortgage payments. An opportunity may have been missed to extend and improve the system to give marginal relief to those who, while paying tax, are paying so little that they are very close to the outer bounds of the system.

I have listened with great interest to the Government's plan, announced over the past few weeks, to assist first-time buyers by giving, in effect, a subsidy on the interest charge. We all welcome any assistance in that direction, but are the Government approaching the matter from the right angle? Rather than give a subsidy to those buying their first property, would not it be better to improve the tax relief to those who have already bought their first property and are finding difficulty in meeting their repayments? In that way—

Mr. Deputy Speaker (Sir Robert Grant-Ferris)

Order. The hon. Gentleman is departing from the terms of the order. Mr. Speaker has warned the House that the debate is very narrow.

Mr. McCrindle

The hon. Member for Willesden, East (Mr. Freeson) referred to the scheme which his party wishes to introduce, in which tax relief is part of its proposed solution. I felt that I was in order in following that line, but so as not to incur your displeasure, Mr. Deputy Speaker, I shall end by saying that, although the order is of considerable advantage to option mortgage borrowers, whereas two years ago the net interest payable by such borrowers was about 5½ per cent., when the building societies' rate of interest was 8 per cent., with the societies rate at 11 per cent. the net interest payable under the order will be 7¾ per cent. That is an increase of almost 50 per cent. I suggest that my hon. Friend the Minister has missed an opportunity and has not gone far enough in the order. While welcoming the order, as far as it goes, I suggest that my hon. Friend should think again and consider whether anything further can be done for the deserving band of owner-occupiers.

10.30 p.m.

Mr. George Cunningham (Islington, South-West)

I am glad to follow the hon. Member for Billericay (Mr. McCrindle) and to put forward the real facts of the situation now facing owner-occupiers. It is one of the myths of British politics that the Conservative Party stands for the interests of the owner-occupier and that it has pushed methods by which more people can be brought to own their own homes. Only once has anything of significance been done to encourage more people, who might not otherwise have been able to afford it, to own their own homes—namely, the option mortgage scheme, which was introduced by a Labour Government, let us remember, and not by a Conservative Government.

Whatever is given to those who would own their own home in any event, we are not advancing the course of home ownership unless we do something which is useful to the people at the margin—namely, something which will persuade people who could not have afforded to buy their own home that they will just be able to afford to do so. That is exactly what the option mortgage scheme did.

The scheme was introduced by the last Labour Government. It was not given an enthusiastic reception by the Conservative Party which was then in opposition. It is interesting to refer to the equivalent of this debate which took place on 4th November 1969. The representative of the Conservative Opposition Front Bench, the right hon.

Member for Chichester (Mr. Chataway), said: The mortgage option scheme is born of the Government's failure to meet the quite categorical promises that were made at the 1964 and 1966 elections to reduce mortgage interest rates— The Minister introduced the order tonight in an extremely low key. I understand why he did so. He is misleading the House when he says that the order is the equivalent or a repetition of the order which was made in 1969. The 1969 order, in the light of the situation created by the 1967 Act, was intended to remove the need for any further amendment of the amount of interest subsidy which would be available to owner-occupiers.

Before 1969 there had been a fixed rate. Because interest rates had gone up it was sensibly thought better to have a schedule with a specified rate of subsidy for different prevailing rates of interest. The only necessity for the present order is that interest rates have gone through the roof not only of what was in existence or in prospect in 1969 but of what anyone then dreamed was ever likely.

If in 1969 anyone had imagined that there would be interest rates of over 10 per cent., that situation would have been provided for in the 1969 order. It was because interest rates of over 10 per cent. were simply unthinkable at that time that that was not done. The right hon. Member for Chichester, in referring to the 1969 order, said: It results from rates of mortgage interest which four or five years ago would have been considered absolutely unthinkable. If anyone from this side of the House had suggested four or five years ago that we should now be debating an order designed exclusively to help people when mortgage rates of interest were over 7 per cent.…no one would have believed him."—[OFFICIAL REPORT, 4th November 1969: Vol. 790, c. 966.] We now have interest rates of over 10 per cent. In fact, they have reached 11 per cent. I shall not proceed along those lines, Mr. Deputy Speaker, because I suspect that you might shortly take exception if I were to continue too long in that direction—although perhaps I should take my chance while it lasts.

It does not do for the Minister to play down the enormity of the situation which we are now facing. Nor can the Government argue that high prevailing rates of interest are something totally out of their control. The high prevailing rates of interest—expressing the reason in one sentence to avoid transgressing the rules of order—derive, first, from the fact that the Government have been bidding the money away from the building societies so that they do not have to tax people and are able to give away tax to their favoured clientele and, secondly, from the fact that they have such an appalling balance of payments situation that they have to have high prevailing rates of interest to attract money from abroad. That is why we have these high rates of interest at present, causing the enormous burdens on those who are either buying or trying to buy their homes, to which the hon. Member for Billericay very sensibly referred.

Turning to the order, we are still faced with some objection. One must accept that, when one has a schedule of rates of subsidy applying to particular prevailing rates of interest, there will be an element of swings and roundabouts. Some people may be slightly worse off than they would be on tax relief, if they could get it, and others will be slightly better off for each given range of interest. That certainly has always been the basis upon which the schedule of rates has been produced—at least, it was the basis adopted in 1969.

I join with the spirit of the remarks of the hon. Member for Billericay—he implied that he would like to see this—in saying that when the interest rates are very high it is desirable always to make the option mortgage scheme at least as good, at any rate of interest, as tax relief at 30 per cent. would provide, and preferably rather better. I see that the hon. Member is indicating assent.

The fact is that at the prevailing present rate of interest—11 per cent.—the rates introduced by the order provide less good treatment for the option mortgage beneficiary than for the person who is taxed at the standard rate. The person who is paying more than the standard rate of tax is that much better off. If one is paying 11 per cent. interest and getting tax relief at the standard rate of 30 per cent., the subsidy is 3.3 per cent. The subsidy provided in this scheme would be only 3.25 per cent.

Interest of .05 per cent. is not all that much. But if it is not all that much for the borrower to worry about, it would not be all that much for the Government to worry about either. Surely, if the Government are prepared to stand up at present for the people who are so hard hit whatever subsidy is given to them, they should be prepared to give, under the option mortgage scheme, at least as much of a subsidy as people would get if they were in receipt of tax relief at the normal basic rate. That is what people simply will not get from the order.

I would have hoped that the Minister would have the consideration and the political sense to raise the rate of subsidy in column (2) of the schedule—that is, for endowment mortgages, in respect of interest rates prevailing between 10½ per cent. and 11⅜ per cent.—from 3¼ per cent. to at least 3½ per cent. To go further than that would involve going beyond the nature of the scheme as originally introduced.

I agree with the hon. Member for Billericay that in these days we should go for something more ambitious. The only sensible more ambitious course to go for was suggested by my hon. Friend the Member for Willesden, East (Mr. Free-son); that we should ditch tax relief on mortgage interest altogether and go over to the so-called option mortgage scheme for everyone. We should then have a uniform and infinitely flexible scheme, so that, according to the prevailing rates of interest, we could make our subsidy marginally great or marginally small, without being tied to finding the equivalent of the standard rate of tax relief. What is more important is that we should by that system, as my hon. Friend said, remove at a stroke the excessive relief which is now provided by means of tax relief to those who are paying tax at marginal rates well in excess of 30 per cent.

No sane country would provide a higher subsidy for the ownership of property to people on £50,000 a year than to those on £1,000 a year. Yet our present system does precisely that. We should look for something more ambitious. Even within the terms of the option mortgage scheme as it was originally designed, the order falls far short of what the prevailing rates of interest require from the Government.

10.41 p,m.

Mr. Channon

I shall try to answer hon. Members' questions, but I suspect that I may not be able to answer them in detail without going beyond what you, Mr. Deputy Speaker, would allow.

No conclusions can be drawn from the existence of the order as to the Government's view on mortgage interest rates. The interest rates are as we know them, and it seemed reasonable, therefore, that the order should be made—I thought that it was generally welcomed by the House—so that we could increase the help to option mortgagors in precisely the same way as was done in 1969—though after a rather longer interval then.

Mr. Freeson

The hon. Gentleman has not answered my question. Earlier this year it was made clear by the Government that they expected the rates to fall by this time. They made that plain to the building societies as well as to the Press and the country. Clearly they were wrong in their judgment. Interest rates are now even higher than the Government feared in the earlier part of the year. Do they expect them to go down below 11 per cent. or 10 per cent. in the near future, as they thought in February or March would be the case?

Mr. Channon

As I say, I do not wish to make any forecast about the level of mortgage interest rates. I do not think that the world level of interest rates and mortgage interest rates in this country are appropriate for me to forecast. It is largely a matter for Treasury Ministers to forecast, if they choose to do so. I do not wish to make any forecast about the movement of world interest rates or about the movement of mortgage interest rates in this country. All I am saying is that the existence of the order implies neither that the Government believe that they will go up or that they believe they will go down.

The modest purpose of the order is to help the option mortgagor so that he will have the chance of receiving the same benefit, or virtually the same benefit, as the person on tax relief. The hon. Member for Islington, South-West (Mr. George Cunningham) rather cleverly, and accurately, noted a tiny discrepancy at a certain rate of interest, there being a difference between tax relief and the help given to the option mortgagor; but this has, in fact been narrowed by the order.

I was asked how many option mortgages had been taken out. The figures up to a fairly recent date show that, since 1968, 540,000 option mortgages have been taken out. Some of them may have been terminated, so I cannot say whether all are in existence now. The figure for 1973—it varies slightly from quarter to quarter—shows that about 20 per cent. of all mortgages taken out are option mortgages. In the first quarter of this year the figure was 22 per cent. In the second quarter it was 19.7 per cent. I do not have later figures. In 1972 it varied from 17 per cent. to 23 per cent. —approximately 20 per cent. overall of all mortgages taken out. There has been a sharp increase in the amount of option mortgages taken out.

My hon. Friend the Member for Billericay (Mr. McCrindle) was right to draw attention to the fact this is a very modest order and is not designed to achieve the other objectives which he has in mind, which may or may not be desirable. This is not an order in which we could carry out some of the more ambitious proposals he has in mind, which would involve, as he says, extra tax relief and probably increased subsidy to home owners That is an interesting point of view.

If I understood the hon. Member for Islington, South-West he was saying we should ditch tax relief altogether and rely entirely on the option mortgage scheme. His hon. Friend the Member for Willesden, East (Mr. Freeson) did not actually say that but perhaps he meant that.

Mr. Freeson

I concertina'd my remarks at that stage. I favour, and this is feasible—a scheme has been worked out by my party and others—the introduction of a universal mortgage subsidy scheme which would replace the present option mortgage system by virtue of an extension of it and replace the present tax relief system which is inequitable.

Mr. Channon

That is interesting. It is the first time I have heard Labour Members say that they are in favour of ditching the tax reliefs for mortgages. We will all have to think about it very hard. I note what Opposition Members have said about relying on a new scheme. This is entirely contrary to what they did when they were last in government, when tax relief continued for house purchase, although different arrangements were made for a further sector of the market.

Mr. George Cunningham

The hon. Gentleman must be fair in representing what we say. No one has ever suggested that the value of tax relief to the standard rate taxpayer should be reduced and not replaced by something else. To say that we are ditching tax reliefs and replacing them by some vague scheme is most misleading. I hope that in any references to this subject it will be made clear that what we are saying is that one form of relief can be replaced by another just as remunerative for the standard rate taxpayer but not having the disadvantages possessed by the present system.

Mr. Channon

The hon. Gentleman is very sensitive on this subject. I used his words. I took them down. He said "We would ditch tax relief and go over to the option mortgage scheme." I thought they were rather colourful words and that I would enjoy quoting from him to show Labour Party intentions.

Mr. Cunningham

Do not be too clever.

Mr. Channon

I will attempt not to be too clever. I am merely quoting from the hon. Gentleman and I do not know whether that is clever or not. It is a serious subject and I am treating it as such.

I am not trying to play down the average level of interest rates. All of us know that mortgage interest rates are at 11 per cent. and that is a serious situation. I did not deal with that at great length because the House has been debating housing matters today and I did not think it would wish to go into the topic yet again at this hour.

As the only Member present tonight, with the exception of my hon. Friend the Member for Northants, South (Mr. Arthur Jones), who served on the Committee stage of the Housing Subsidies Act 1967, I believe it is true to say that we welcome enthusiastically the option mortgage scheme and put forward a number of suggestions for its improvement, not all of which, alas, were accepted. If the hon. Member can produce quotations to show that is not so, I will withdraw. It is common ground that we should have an option mortgage scheme or something of the kind to enable those who do not pay tax at the standard rate to receive an equivalent amount of assistance when buying their house.

The hon. Member for Islington, South-West quite rightly quoted what my right hon. Friend the Member for Chichester (Mr. Chataway) said on the occasion of the last order, when my right hon. Friend remarked that at the previous General Election at least one prominent member of the Labour Party was widely reported as saying that there would be much lower interest rates—3 per cent. was quoted. I do not say that the person in question was correctly quoted, but it was a widely-held view at the time that he had said it.

I have answered most of the questions that were put to me. If there are any that I have omitted to answer, I shall write to the hon. Member concerned. The order is a modest measure. It follows the precise precedent set in 1969 when interest rates rose. Admittedly on this occasion they are much higher than they were then.

Mr. Cunningham

Before the Minister concludes, may I ask him to reconsider whether, in view of the current interest rate of 11 per cent., which is likely to persist for some time, it would not be better to introduce a schedule to give option mortgagors at least as much relief as, if not more than, that obtained by a standard rate taxpayer? Will he not reconsider this and the possibility of a revised schedule?

Mr. Channon

The hon. Member says that the 11 per cent. rate is likely to go on for some time. That is his view and he may or may not be correct. In the order we are only following the precise precedent set in the Housing Subsidies Act by our predecessors where the aim was to have, within broad bands, equivalent relief for a person using the option mortgage scheme and a person enjoying tax relief at the standard rate. There may be a fractional difference one way or the other. It would be extraordinarily difficult and extremely complicated for the lenders and the borrowers if we were to fiddle around with the tiny differences in percentages to try to meet every conceivable mortgage rate that might arise within these broad bands. The difference is infinitesimal. It could hang one way or the other depending on the mortgage rate at any given time. I should be reluctant to do that. For one thing, it would mean consulting all the lenders again.

I am anxious, as no doubt the House is, that the order should go through so that a modest extra measure of help may go to option mortgagors at an early date. I hope that the order goes through so that we once more reach the position of broad equivalence between option mortgagors and those on the basic rate with tax relief. It is a small measure and it is common ground between both sides of the House that it is worth while.

Resolved, That the Assistance for House Purchase and Improvement (Increase of Subsidy) Order 1973, a draft of which was laid before this House on 31st October, be approved.

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