OPTION MORTGAGE SUBSIDY (Hansard, 16 November 1978)

§ The Under-Secretary of State for the Environment (Mr. Ernest Armstrong)
I beg to move, That the draft Assistance for House Purchase and Improvement (Variation of Subsidy) Order 1978, which was laid before this House on 2nd November, be approved. This draft order modifies the scale of option mortgage subsidy at present set out in statutory instrument No. 1336 of 1977. As the House is aware, the option mortgage scheme is specially designed to help into owner-occupation prospective home buyers with lower incomes. This is achieved by giving assistance by means of a direct subsidy to reduce the rate of interest paid, instead of the help available more indirectly through tax relief to an ordinary mortgagor.
We estimate that at present in Great Britain about 750,000 householders are buying their own houses with the help of an option mortgage. This year, from January to June, 60,000 option mortgages have been taken out, representing 14 per cent. of total mortgages.
The present draft order, like the previous ones in 1974, 1975 and 1977, is made necessary because of a change in income tax rates in this year's Finance Act. The standard rate of tax was reduced from 34 per cent. to 33 per cent., and a reduced rate band of 25 per cent. on the first £750 of taxable income was introduced. The Government have considered whether option mortgage subsidy should be reduced to 33 per cent. or, indeed, to some lower rate. We have to bear in mind that a large number of people with option mortgages would be eligible for tax relief at 33 per cent. but have no opportunity under existing legislation to transfer to a tax relief mortgage.
On grounds of equity, we have therefore decided to vary the subsidy so that the option mortgagor is treated in the same way as the mortgagor who gets full tax relief on his interest payments at the new basic rate of 33 per cent. The order will reduce the existing rates of subsidy from 1st January 1979, so that the new rates correspond with the 33 per cent. tax relief.
The subsidy payable, for example, on an annuity mortgage at the Building 702 Societies Association's current rate of interest of 11.75 per cent. will be reduced from 3.9 per cent. to 3.8 per cent. Option mortgagors will, accordingly, have to pay slightly more each month. On a mortgage of £8,000, which is the average option mortgage, an extra 56p a month will be payable. If the mortgagor so chooses and the lender agrees, he may continue with the same repayments over a longer period.
These increases are similar to the increases in net mortgage payments which ordinary mortgagors with full tax relief have experienced as a result of this year's tax changes. I am sure that it is the wish of the House that option mortgagors should continue to receive the same assistance as those with tax relief. It is with this aim in view that we have introduced the order. I hope that the House will approve it.

§ Mr. Michael Morris (Northampton, South)
The option mortgage scheme is one which the whole House supports. The Conservative Party claims the parentage and conception of the scheme, if not the actual birth. We shall not oppose the order this evening.
I wish to put a couple of points to the Minister. He has rightly drawn the attention of the House to the number of people taking up the option mortgage. It is not just a tiny percentage of the market. We are dealing with almost 15 per cent. of the market, and therefore we should look at it very closely.
I am pleased that the rumours that were going around when it was obvious that some changes were being contemplated were unfounded and that the temptation to adjust to the 25 per cent. rate of the lower tax band has been resisted. The Government have come up with this new flexible arrangement, which is more realistic.
One matter which is not covered by the proposals is the lack of flexibility under the mortgage option scheme. Having opted in, people cannot opt out in less than four years. The Minister will be aware of the feeling in the market that the Government should look at this restrictive provision and put a little more flexibility into the scheme. Perhaps there should be an option after 12 months or two years to enable people to change 703 their minds if their circumstances change and they want to opt into a tax relief scheme.
I believe that merely saying that these people should have equality with those getting tax relief is being a little negative. They are on the first rung of home ownership and therefore at the very least they should have equality. In fact, I. think that they should be treated more generously. We take the view that as they are on the first rung they should never be put in a situation in which they are more adversely affected than someone who is on tax relief. With those 704 observations, I wish this instrument a swift passage.

§ Mr. Armstrong
With the leave of the House, Mr. Deputy Speaker, I should point out that we have very much in mind the need for flexibility. In the comprehensive housing Bill which will be brought forward this Session we shall have certain proposals to make.