HC Deb 12 February 1982 vol 17 cc1271-8

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Berry.]

2.32 pm
Mr. George Cunningham (Islington, South and Finsbury)

In December of last year, the Government announced that they intended to suggest to Parliament that we should make a change in the manner in which we give tax relief on interest paid on loans used for house purchase and house improvement, commonly but not always accurately referred to as mortgage loans.

At the moment, borrowers pay the gross amount of such interest to the building society or other lender and they obtain the tax relief from the Inland Revenue in PAYE codes or in end-of-year assessments. The proposal by the Government is that, as from April 1983, borrowers should pay the net amount to the building society. The society will then recover the tax relief from the Inland Revenue and in this way, except for relief above the standard rate of tax, this ingredient would disappear from tax assessments. This will make life easier for the Inland Revenue and so allow savings in its administrative costs.

I welcome the basic idea of that change. It repeats a change which Parliament made a few years ago in the manner of giving tax relief on life assurance premiums and it is long overdue. In the case of insurance relief, that is now and was before the change given only at the standard rate and I regret that the Government are not taking the opportunity to introduce that feature in 1983 in the case of mortgage relief. My view is that mortgage tax relief, even at the standard rate, does not, contrary to common opinion, operate to the benefit of borrowers in general and the cause of home ownership in general, and that that cause would be helped by phasing out the relief so long as that was done over a very long time of something like three decades.

Mr. Bruce Douglas-Mann (Mitcham and Modern)

I appreciate that the phasing out of tax relief will create problems, but bearing in mind that, according to the last public expenditure White Paper, the cost of mortgage interest tax relief approached £2,000 million, and that for the comparable year the total expenditure on housing was only just over £4,000 million, representing approximately 50 per cent. of expenditure on other aspects of housing, does not my hon. Friend think that it would be preferable to phase out tax relief over a shorter period so that the money spent on housing could be concentrated on investment for those in housing need rather than on holding down the cost for people who already have houses?

Mr. Cunningham

My hon. Friend and I are good Fabians. I would settle for phasing it out over three decades if that made people more likely to accept phasing it out at all. It is something that has to be done gradually, if it is to be done at all, not only to get people accustomed to the idea but also to avoid the terrible consequences that would occur, as my hon. Friend knows better than I, if it was done too quickly. Although this is a fascinating subject, there is not the time to discuss it now. I am dealing with a more precise point.

My objection to the Government's proposal is not to the basic idea but to the unfortunate consequences that will follow if the scheme is carried out as the Government and the building societies seem to intend. In a word, the Government and the building societies, between them, are set on making the burden on borrowers heavier to a significant extent at a time when the borrower is least able to bear it. The change will impose a considerable extra charge on those buying for the first time and will therefore make a purchase impossible for some who could afford it under the present system.

It is ironic that this Government, who go on all the time about home ownership, should be introducing this new discouragement to people setting out on their first house purchase. However, this unsatisfactory feature of the plan can be easily removed by any one of a number of devices. It would be truer to say that the unsatisfactory feature would not exist at all if the building societies would implement the basic idea in the most natural way. The disadvantage only applies to repayment mortgages. It does not apply to endowment mortgages. I am therefore talking only about repayment mortgages.

Let us take the case of a person who takes out a mortgage loan to be repaid over 25 years. At present, the building society quotes to the borrower a figure for his gross monthly payment over the period. If there are no changes in the rate of interest, the figure for monthly repayments will remain the same for the whole 25 years. The actual burden on the borrower, however, will not remain constant. As the capital is gradually repaid, less and less of each monthly payment will represent interest and more will represent repayment of capital. Since relief only applies to interest, less relief will be given in the borrower's tax account as the years go by. This means that the net burden will grow, subject to the beneficial effects to the borrower of inflation.

This profile of low net cash payments at the beginning and higher net cash payments at the end has the advantage of making it easier for the first-time borrower to get his feet on the house-owning ladder. It is in the first year or two that the borrower is often straining his resources to the limit before inflation erodes the real cost of his outgoings. That is when he needs any help he can get. The present system gives it.

Under the new system, it would be possible to retain this profile of low outgoings at the beginning and higher outgoings at the end. But instead of the Inland Revenue achieving that by reducing relief given each year, it would be necessary for the building societies to arrange with each borrower to raise slightly the level of payment each year to the building society. Borrowers now have to amend standing orders in response to changes in interest rates. Under the new system, they would need to raise the payment once a year even if there had not been a change in the interest rate.

The building societies regard this as a burden that they do not want to carry. They intend to adopt a method whereby the borrower will pay a constant net sum to them over the whole period of the mortgage. This means that the borrower will have to pay more in the early years under the new system than now and less in the later years than now. The burden will shift to the early years where it really matters from the later years where it does not because by then it is eroded in part by inflation.

This shift of burden to the early years will be at its greatest in the first year, right at the beginning of the period when the borrower needs the greatest help. The scale of the disadvantage will vary according to the length of the mortgage period and the current rate of interest. The Building Societies Association has published comparative figures for 25-year mortgages at 15 per cent. interest. These show that the new system will impose a 41/4; per cent. increase in the borrower's outgoings in the first year of such a mortgage. The increase will gradually diminish but will still stand at 3 1/4 per cent. in year five of the period. The cross-over point where the two systems will produce the same burden will come at about year 11, and thereafter the new system will start to pay back, as it were, for the hard early years with lower payments than would be needed in those later years by the present system.

The Building Societies Association has not produced figures for shorter mortgages, but I think I am right in saying that, the shorter the mortgage period, the less the distortion will be. But even a two-year mortgage seems to produce an additional burden of 1½per cent. to 2 per cent. in the first year, so 10-year or 15-year mortgages must have distortions much nearer to the 41/4 per cent. applying to the 25-year mortgage. Note that the people who tend to get longer mortgage periods, say 30 years, are young people, exactly those who need most help in the early stages. Their disadvantage will be greater than the 4¼ per cent. applying to the 25-year mortgage.

Average mortgages these days are running at about £15,000. The Building Societies Association figures show that a young couple taking out a £15,000 loan over 25 years at 15 per cent. will in the first year have to lay out £5.85 a month more during the first year. They will pay £5.50 a month more in the second year and about £5.10 a month in the third year.

In some parts of the country, of course, average loans are higher, and the disadvantages will be higher there. Therefore, those who suffer most by having highest house prices in their areas will also be most penalised by the new system. Loans of £20,000 are not uncommon in London for first-time buyers. Indeed, loans of that size are needed to acquire even a small flat in London. Under the new system they will cost the young couple about £8 a month more than now.

It might be thought that since the new system shifts the burden from the late years to the early years, people already well embarked on a mortgage will not be affected. That is not so. If someone has a 30-year mortgage and is in year five of it, the new system will mean that in the remaining 25 years he will be affected just like someone who is starting a new 25-year mortgage. His disadvantage, starting in April 1983, will be 4¼ per cent. His outgoings will jump by that amount all in one go in April next year.

All those examples so far relate to someone who buys a house and keeps it. But of course that is not the normal pattern. Most home owners buy a house, then five or six years later move to a more expensive one and then repeat the process at least once. Even if they are not trying to improve their housing but only moving from one town to another, they usually still have to borrow more money at the time of the move to cover the costs of buying the new place—such as solicitors' costs, legal fees, and so on. Those people will suffer the disadvantage of the new system every time they borrow more money.

I take as an example a young couple who buy with a 25-year mortgage and who, five years later, move to a bigger place and five years later move again up market. That is a very common pattern. If they are young enough to be still liable for a 25-year term at the last move, during the whole of their first 15 years and more they will be paying more for their loan than under the present system, assuming that they double the loan the first time and raise it by the same amount the second time.

The amazing fact is that the new system will result in an increase in the payments required by absolutely all who have a current repayment mortgage at the time the new system is introduced in April 1983. There is just one exception—people who are in the last 12 months of their repayment period.

The Government, the building societies and the banks propose to introduce a real disincentive to all borrowers, but a particular disincentive to those who will feel it most—the first-time buyer, people in the early years of repayment, and those who have to move from one place to another and borrow more in order to do so. All that is just to avoid the business of sending out to borrowers each year a notice asking them to raise their standing orders by an amount that would, in all normal circumstances, be swamped by inflation in the previous year.

The Building Societies Association has told me that it does not think that these changes will cause trouble or significant burden and that, if any particular borrower finds himself in difficulty, he can ask the local manager for special arrangements. It would be better so to arrange things that, in the first three years, perhaps five but no less than three, of mortgage payments, no payment would be needed greater than under the 'present system. There would then need to be an adjustment of the amount due at the end of the period but by then it would be bearable. There is an infinite variety of possible softening devices like that which could be adopted. It does not matter which we adopt, but it needs to be a regularised device, not just a case of allowing a person in hardship to turn to the local manager. Otherwise, too many young couples will decide that the regular pattern put to them is one which they cannot afford.

For years, we have all toyed with ways of softening the approach to the first house purchase by new buyers. We have not yet found anything satisfactory, but if the Government's proposal goes ahead in the intended manner this will be the first Government ever to make the business of buying a first home actually more onerous for young couples. That is perverse and gives the lie to the Government's protestations in support of home ownership and we should not let it happen.

2.47 pm
The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)

I congratulate the hon. Member for Islington, South and Finsbury (Mr. Cunningham) on raising what is an important topic in the Adjournment debate, and on the way in which he presented his case. He set out the nature of the proposed change very fairly. However, I find it a little incongruous that he should preface his remarks by saying that, admittedly over a long time, he would wish to see the mortgage interest tax relief phased out. That would certainly increase the cost of a house.

Mr. George Cunningham

indicated dissent.

Mr. Bruce-Gardyne

The hon. Gentleman shakes his head, but that cannot have any other effect but to increase the cost of home ownership throughout the period of the mortgage.

Mr. Cunningham

I will not go into that now. but I deny that allegation. There ns all the difference in the world between gradually phasing out all mortgage taxation reliefs, which would not have certain effects, and altering the conditions applying to any one particular group. An entirely different effect is produced.

Mr. Bruce-Gardyne

I do not see how one could abolish all mortgage interest relief without there being deleterious effects on home purchasing through a mortgage. The Government have no intention of taking that step. We have made that clear on several occasions and I should emphasise that that plays no part in the change that we are making.

The hon. Gentleman suggested that the main motivation behind the change was for the convenience of the Inland Revenue. I make no secret of the fact that this change is calculated to enable the Government to make a saving of 1,000 personnel in the Inland Revenue at a time when we are trying to bring the Inland Revenue numbers, and numbers in the Civil Service as a whole, under control. That is an important factor.

However, there is another, significant factor that the hon. Gentleman did not mention. The present system worked very well in the days when interest rates did not move rapidly and frequently and when the changes in the level of mortgage rates were not frequent. Nowadays, alas, we are in a period of much more frequent changes in mortgage rates, with the consequence that under the present system there is a substantial delay, given PAYE, before a mortgagor gets the benefit of any reduction in the rate on his tax liability. He has to wait, in other words, for considerable periods, and that will not happen under the new system.

The burden of the hon. Gentleman's remarks was concerned entirely with what he saw as the impact of the change in increasing the cost of payments to the building society by the mortgagor in the early years of a mortgage. I do not seek to challenge his figures to the extent that they reflect the constant net repayment system. He was right to say in passing that this would not apply to the endowment system. Under the endowment system, the cost would be evened out right through the life of the mortgage.

The hon. Gentleman has had discussions with the building societies, and I think it is fair to say that in general they would prefer to stick with the constant net repayment system. Other lenders may take a different view.

The hon. Gentleman said that the Government and the building societies were imposing more onerous arrangements. I must emphasise that it is not the change to mortgage interest relief at source—known by the ugly name of MIRAS—to which the hon. Gentleman takes exception. He objects to the way in which the change affects the existing arrangements for the repayment of a mortgage between the mortgagor and the lending institution.

It would not be right for the Government to use a proposal of this kind to intervene in order to regulate the manner in which building societies and other lenders conduct their relationship with those who take mortgages from them.

Mr. Cunningham

I accept the legality of what the Minister says. However it would be possible for the Government to say "Here is a change which we want to make, but we shall feel able to do so only if you on your part will operate it in certain ways." That would be a perfectly legitimate use of the Government position and the building societies' independence. That is the kind of attitude that I want the Government to adopt—and I may say that in my speech I was addressing both the Government and the building societies.

Mr. Bruce-Gardyne

I understand the audience to which the hon. Gentleman's remarks were addressed. My answer is that it would be hard to claim—and the Government do not claim—that the scheme is being introduced for the convenience of the building societies or other lenders. It is being introduced partly for reasons of administration in the Inland Revenue but also because the new system will be fairer since the relief will no longer be deferred as it is under the present system.

In equity, I do not think that we could ask the building societies or other lenders to enter into new arrangements that they would find more onerous when it is not they who want to make the change. But, as the hon. Gentleman pointed out, the building societies have made it clear that where borrowers find that, owing to the increase in the net cost to them in the early years of their mortgages, they are in difficulties, a local manager will be encouraged to help in any way that he can to mitigate those difficulties.

The hon. Gentleman addressed his remarks quite fairly to the building societies. I must emphasise that there are other lenders in this business. It is nowadays an increasingly competitive business—to an extent which sometimes causes us concern in the Treasury. If, as the hon. Gentleman suggested, endowment mortgages became more attractive, the tendency might be for the borrowers to make a preference in that direction. There is a market and borrowers have a choice.

I do not dispute the figures that the hon. Gentleman gave in relation to additional costs. I venture to throw at him another set of figures, which might help to put the matter in a broader perspective. I am told that on a new 25-year loan of £15,000—which as the hon. Gentleman recognised is the average loan taken up by borrowers—and a 15 per cent. rate of interest, a borrower's monthly payment is £193.50. If the capital debt were paid off more quickly to enable the tax payment to remain constant, the increased cost to the borrower would be less than three-quarters of 1 per cent. per week.

I know that the hon. Gentleman does not misunderstand, but there might be misunderstanding elsewhere, so I emphasise that the additional money does not go into the Government's pocket, but it reduces the borrower's debt. The hon. Gentleman recognised that our experience with low cost start loans has not been encouraging in terms of take-up. There has been much discussion about it over a number of years and the interest by borrowers has not been great.

The building societies—the experts—would argue that on the whole people prefer a constant repayment profile. If there is a marked preference in the opposite direction that will assert itself in the market place. I do not think that there is a case for Government intervention along the lines that he suggests.

The hon. Member did not mention the option mortgage scheme, which is to be phased out. The borrower under an option mortgage scheme will not face any of the increment to which the hon. Gentleman referred. It is important to put that on the record.

As the hon. Member knows, the proposal is that the necessary legislation will be introduced in this year's Finance Bill. Obviously, we shall have opportunities to go further into the details of the scheme then. I look forward to the hon. Member's comments on that.

Mr. Cunningham

We have a few minutes left. I did not want to interrupt the Minister again and prevent him from saying something that he was prepared to say. I was a little puzzled by the figures that he quoted a few minutes ago. He was talking about a 25-year mortgage and a loan of £15,000 at a 15 per cent. rate of interest. Those are exactly the bases quoted by the building societies. Twenty-five years at 15 per cent. is the basis of the exemplary figures published by the building societies.

In my speech I used the example of a £15,000 loan as against the £10,000 figure that they used. The Minister said that there would be a three-quarters of 1 per cent. difference in payment per week. It does not matter whether the loan is for one week, one month, one year, or five days because it is the same percentage. They cannot both be right. The Building Societies Association says that the difference in the first year is 4.26 per cent. If it were three-quarters of 1 per cent. I would not be having this debate because the difference would be negligible. It would still be perverse to intensify the burden in the early stages, but it would be negligible. But 4¼ per cent. is a different thing. There is something funny about the figures quoted by the Minister.

Mr. Bruce-Gardyne

The hon. Gentleman's figure relates to the increased cost in the first year of the mortgage. The figure that I cited was, I think, for the lifetime of the mortgage.

Mr. Cunningham

That is not the point.

Mr. Bruce-Gardyne

The increase on the figures that I have given the House is somewhat less than £1.50 a week. How does that relate to the hon. Gentleman's figure?

Mr. Cunningham

Over the whole period, the borrower's outgoing must be less under the new system than under the old system. I have never tried to deny that. If someone bundles up his repayments at the early stage, he pays the amount off more rapidly and, therefore, the total repayments must be less. However, that is not the point. No one in his right mind wants to pay it off early, anyway. I am talking only about the burden on the early years. It does not matter one hoot if the burden is insignificant over the whole period. I should argue that the burden is minus over the whole period. The only time that a borrower feels the burden is the first few years. If he can manage it in the first year, he will manage a bit more comfortably in the second year. If he can get through the first three years, he will be okay. That is the point. The figure cited by the Minister is irrelevant to the argument.

Mr. Bruce-Gardyne

I do not wish to mislead the House. I think that the correct figure, which I should have given, is £1.50 per week. That is much the same as the figure that the hon. Gentleman cited. I am sorry if I misled him about the percentage. I do not dispute that that is a significant extra burden on the young home owner. However, I do not entirely go along with the hon. Gentleman's suggestion that that constitutes a sufficient argument for abandoning a change that, as he conceded, is broadly desirable. We will—

The Question having been proposed after half-past Two o'clock and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at two minutes past Three o' clock.