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Take that, rule book

Whoever said that throwing money at a problem doesn’t solve it clearly hasn’t told chancellor Alistair Darling. Last week’s pre-Budget report did little to allay fears that the economy is spiralling out of control. Despite Darling’s promise to bring the UK’s finances back into balance by 2016, the chancellor and the government have been accused of recklessness.

Of course, the Opposition has been at the vanguard of attacks on the proposals. Shadow chancellor George Osborne accused the government of risking the country’s economic health.

“Stability has gone out of the window,” says Osborne. “Prudence is dead. Like the gambler who can’t give up, Darling thinks he can borrow his way out of debt. This isn’t just a tax bombshell, this is a precision-guided missile aimed at the economy. The future is being mortgaged to bail out the mistakes of the past.”

And in an exclusive interview with Mortgage Strategy, shadow housing minister Grant Shapps agrees.

“The government is playing Russian roulette,” he says. “Put everything on red and see what happens.”

And red is the right word. The government’s spending as outlined in the PBR could see the UK saddled with £1trillion of debt. According to Osborne this is almost double the amount the chancellor forecast earlier this year.

So what exactly are we getting out of it? The main components of the PBR in relation to housing and the property sector include the creation of a panel to monitor lending to households and individuals and the decision to implement the suggestion made by the Crosby report to temporarily guarantee unattractive mortgage-backed securities.

Lenders were also told they must wait three months before initiating repossession proceedings when clients fall into arrears to give them time to get back on their feet.

The government also pledged £775m for social rented housing and shared equity schemes, £15m for free debt advice and £3bn to create more social housing and improve motorways and schools.

The industry response to the PBR has been mixed.

“We broadly welcome the housing market package announced by the chancellor,” says Peter Williams, executive director of the Intermediary Mortgage Lenders Association. “We note the agreement on a three-month moratorium by lenders prior to starting repossession orders. But this is in line with existing lender practice and their efforts to work with and explore options for borrowers facing difficulties meeting repayments.”

Stuart Law, chief executive of Assetz, also welcomed the report, calling the investment in social housing particularly good news.

“I look forward to hearing the government’s full response to the Crosby report in the Budget next spring, which will hopefully bring about a significant increase in the supply of mortgages,” he adds.

“This would be excellent timing, with an increase in borrowing filtering through the market to coincide with a firming up of house prices in September 2009, as we predict.”

The Building Societies Association, which will play a role in the government’s lending panel, says it is looking forward to contributing to the initiative.

“We share the government’s commitment to reduce the numbers of consumers losing their homes through mortgage repayment difficulties,” says Adrian Coles, director-general of the BSA. “The commitment not to commence repossession action until at least three months after accounts have gone into arrears reflects standard building society practice.”

The Association of Mortgage Intermediaries and the Council of Mortgage Lenders also praise the government.

But it hasn’t been all good news. Many brokers and industry professionals have criticised the report as sensationalist.

“Darling’s PBR is nothing more than an ill-conceived headline grabber,” says Henry Edjelbaum, managing director of accounting firm AIMS.

“His statement that it was a deliberate decision to support consumers and businesses through difficult times when considered in relation to the VAT cut demonstrates that the government has not thought things through. We would all welcome a fiscal stimulus package to ensure that the recession is shorter and shallower than predicted, but what this package has created is extra work and an administrative nightmare for small businesses just before Christmas and ahead of the January 31 tax deadline.

“For example, consider small VAT-registered retailers that take their responsibilities seriously and try to meet the full VAT reduction,” he adds. “They have to recalculate their prices, relabel stock, adjust the tills, amend their websites and organise the reprinting of their catalogues. They will have to decide what to do with mail order purchases in the pipeline and it is probably too late for them to change their advertising.

“They probably won’t see any change in business levels – if consumers don’t want to spend £117.50, will a reduction to £115 change their minds? They’ll also realise that they will have to adjust their accounting systems, which will probably amount to £500 to £1,000 of unpaid labour.”

David Bexon, managing director of, also slams the report.

“As anticipated, the chancellor has offered little to stimulate the housing market in the short term,” he says. “While I welcome his measures to protect home owners against repossession, there were no proposals to encourage buying activity, aid first-time buyers or increase mortgage supply.”

Bill Keighley, broker at Bramleys Financial Consultants, says the tax mountain the UK will ultimately face is frightening.

“Labour is killing this country with a massive tax burden and a system of tax credits that discourages Britons from finding work and which some cynically exploit,” he says.

“How on earth did anyone survive before the advent of tax credits, I wonder? We are in a huge mess and this tax and spend will cost us dearly.”

But it’s not all doom and gloom. Paul Holden, sales director at MortgageStream, claims he has identified a positive for brokers from the PBR.

“Has the impossible happened?” he says. “Is there finally some good news for brokers? I’m referring to the government announcement of the ‘stunning’ 2.5% reduction in VAT.

“A bone of contention for brokers is always the fact that they cannot charge VAT on mortgage advice but have to pay it on all business purchases. This problem still exists but I guess that brokers will have 13 months to enjoy a 2.5% reduction in the VAT they pay suppliers. Try not to spend it all at once.”

Once again the government has delivered proposals to the industry that do not go far enough to address the problems at hand. Is there enough on offer to save the mortgage industry or did the government just blow its last chance to make amends? Yet again, all we can do is wait and see.

Sneaky VAT move in posturing PBR

By Ray Boulger senior technical manager John Charcol

Most of the positive aspects of the pre-Budget report had been leaked beforehand but many of the negatives were worse than expected. For example, tipping the wink about the 2.5% VAT cut led to anticipation that the cost of fuel, alcohol and tobacco would come down. But not indicating that duties on those products would be increased by the same amount was stupid. For example, for those in the VAT system it means a tax increase on fuel as duty cannot be offset against VAT receipts.

Having got the Budget forecast for this year’s borrowing requirement so wrong, I doubt many will give much credence to Darling’s forecasts as far ahead as 2015, especially when they are based on what appears to be wildly optimistic predictions about the speed of the UK’s economic recovery. The scorched earth policy of announcing tax increases to come after the likely election date of spring 2010 appears to be more about politics than sound economics.

The PBR contained little positive news for the mortgage market. Increasing the maximum size of mortgages covered by Income Support for Mortgage Interest from £175,000 to £200,000 is helpful, as is the previously announced plan to reduce the period before interest payments are met by the state from nine months to three. This should avoid some repossessions.

When commenting about borrowers facing repayment difficulties, the chancellor implied that he had got lenders to sign up to a three-month moratorium on repossession proceedings.

“It is right that repossession should be the last resort,” he says. “I am pleased to say that this has been recognised by lenders. The major lenders have agreed that where someone is facing repayment difficulties with their mortgage, they will wait at least three months after the borrower falls into arrears before initiating repossession proceedings.”

The chancellor appears to be insinuating that lenders initiate repossession proceedings within three months of borrowers falling into arrears. This may happen occasionally, mainly with second charge or sub-prime mortgages, but it is not normal practice for most lenders.

“It is our priority to make sure that hard-working home owners who suffer a loss of income through no fault of their own have the option to stay in their homes,” says housing minister Margaret Beckett.

I am glad she referred to hard-working home owners rather than just hard-working families as Prime Minister Gordon Brown always says. It must be galling for hard-working single Britons to be made to feel unimportant.

A big disappointment in the PBR was its failure to at least reduce Stamp Duty if not temporarily abolish it. A suspension would have provided a stimulus to the housing market but as there is nothing in the PBR to help increase the supply of funds to lenders, maybe the chancellor was worried that they wouldn’t be able to meet the additional demand resulting from the tax’s scrapping.

One bit of good news for the mortgage market is that because the tax cuts are not at the top end of the range of expectations, the Bank of England should not feel too inhibited about a further significant cut in the base rate.

Darling’s PBR gamble as the battle lines are drawn for the next election

By Alan Cleary managing director Exact

Last week’s pre-Budget report was more than just financial stimulus for our ailing economy. It also marked the unofficial start of the campaign to win the next general election. Of course, pretty much everything politicians do is designed to keep them in power but the battle lines have been clearly drawn for the first time since David Cameron took on the Opposition’s top job.

Since the invention of New Labour it has become increasingly difficult to see policy differences between it and the Conservative Party. Indeed, in recent years there have been examples where policy has been based on matching the other side’s pledges.

Now there is clear blue water between the parties. Do you believe in a tax and spend policy such as that being rolled out by the government or do you think that we need to exercise restraint on borrowing now so that we don’t pay for it later?

No doubt everyone will have worked out how much better or worse off they are after the PBR but even those who believe they are better off must bear in mind that all this extra borrowing will have to be paid for by higher taxes in the future.

Deflation is what the government is most scared of as it is deeply damaging and self-perpetuating. If consumers believe that prices are going down they delay spending to buy later. By putting money in their pockets now, Darling is hoping that they will continue to spend and thus avoid the even greater levels of unemployment that will occur if they stop.

With the battle lines drawn we should see an increasingly obvious difference in the parties’ policies, which in turn will make it more obvious which party is going to win the next election. Prime Minister Gordon Brown has seen a bounce in his popularity since he took decisive action to tackle the banking crisis but unless there is clear evidence next year that his policies are working he will be out of a job. If there are signs that the latest package of measures is working, expect a snap election in 2009. Otherwise it will be delayed until 2010 and the likelihood of a Conservative government will increase.

Extract from chancellor Alistair Darling’s PBR speech

Mr Speaker, I want to take steps to improve the supply of mortgages, avoid repossessions and increase the number of new homes.

Today, I can set out proposals to do this.

The current problems in the housing market are a result of the credit crisis, which has drastically reduced the opportunities for people to get a mortgage loan.

Last month I took decisive action to recapitalise the banks so they can maintain the availability of lending including mortgages.

Today I welcome the publication of Sir James Crosby’s report on finance in mortgage markets.

His principal recommendation is that the government support the mortgage market by providing, for a temporary period, guarantees for securities backed by new mortgages. I share Sir James’ concerns about the availability of mortgage finance.

To implement Sir James’ recommendation, the government would need to obtain State Aid approval from the European Commission and resolve some technical and practical considerations.

But we will proceed to work up a detailed scheme based on his recommendations and seek State Aid approval to proceed.

I will also take into consideration the interaction between this proposal and the Credit Guarantee Scheme. I will report back by the Budget.

Mr Speaker, I am setting up a new body – the lending panel – which will monitor lending to both business and households.

It will bring together the government, lenders, trade bodies, consumer groups, regulators and the Bank of England to monitor lending levels and practices by banks.
And we intend to consider how else we can help ensure that those in work but facing financial difficulties can remain in their homes.

It is not just the availability of new mortgages which is a problem in the housing market. It is also fears about meeting the cost of existing home loans.

Mr Speaker, it is right that in these cases repossession should be the last resort. I am pleased to say that this has been recognised by the lenders.

The major lenders have agreed today that, where someone is facing repayment difficulties with their home mortgage, they will wait at least three months after the borrower falls into arrears before initiating repossession proceedings.

This will give home owners time to work with lenders to find a solution.

And I also welcome the commitment from lenders to explore all possible options, including accepting a minimum payment or mortgage rescue products, before and after home owners get into difficulties.

It is also important, Mr Speaker, that families worried about their finances and mortgages can get expert and impartial advice.

So I am announcing today £15m of new funding for free debt advice, available to everyone regardless of circumstances across the country.

I intend to take two further steps to help home owners facing financial difficulties.
First, in September I extended the Support for Mortgage Interest scheme which covers mortgage interest payments for those who have lost their jobs.

And today I can announce we will also increase the upper limit of the scheme for mortgages up to £200,000 from the present limit of £100,000.

This will help ease worries for home owners who have lost their jobs as they look for new employment.

I have also agreed that for six months the level of interest rates covered by the scheme will remain, despite the base rate fall, at just over 6%.

Second, I can also announce new mortgage support for people in work.

In September we set up a mortgage rescue scheme helping vulnerable home owners facing difficulties to stay in their homes.

Today I am extending this scheme so it will also cover those at greater risk as a result of taking out second mortgages.

Together this provides help against repossession worth £200m.

Mr Speaker, first-time buyer demand and long-term housing supply are the two essential cornerstones of the housing market.

In September to boost the market as a whole, I agreed that £700m of government spending for new social rented homes and shared equity schemes should be brought forward to this year and next.

Today, as part of the acceleration of capital spending we will bring forward an additional £775m this year and next to invest in thousands of new and modernised social homes as well as regeneration projects.

Overall, this is a package of support for housing worth a total of £1.8bn.

Support which can only be provided because I have decided we must act to give real help to people.

It will help home owners of today stay in their homes and help the home owners of tomorrow buy their first home.

Chancellor commits to lending boost

By Natalie Holt, reporter Mortgage Strategy

Chancellor Alistair Darling has pledged to hold banks to account as he admits the government needs to do more to get lending flowing again. Facing MPs’ questions at an emergency House of Commons debate on the pre-Budget report last Wednesday, the chancellor conceded that more needs to be done to address the lack of funds affecting home owners and small businesses.

“We need to go further than the PBR,” he says. “The government will hold banks to account. Just as in the good times the banks were falling over themselves to get customers through their doors, it falls to them in the bad times to treat their customers fairly.”

He says the government needs to do everything possible to get banks to resume lending. He is also calling for an international approach to mitigate the effects of the global economic slowdown.

“If we didn’t do anything, the costs to families and businesses would be far higher,” he adds.

But shadow chancellor George Osborne retaliated by hitting out at the government-backed Northern Rock for hiking its one-year fixed rate from 3.99% to 4.19%.

The chancellor also came under fire for considering a secret hike on VAT to 18.5% after the next election.

“We know about the secret plan for VAT,” says Osborne. “The government has totally destroyed public trust in its motives.

“Normally it takes a week or so for the Prime Minister’s Budget to come
unstuck. This one has completely fallen apart in just 48 hours.”


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