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Opportunity Lost

Alistair Darling missed the chance to raise his stock among housing professionals when he delivered a dreary Budget that did little more than tinker with important issues such as Stamp Duty, says Christine Toner

Few people can have had as bad a first year in their job as chancellor Alistair Darling, so his first Budget gave him the chance to shine at last. Here was an opportunity to make positive changes and prove his worth.

Unfortunately, it proved to be a case of no alarms and no surprises. For the mortgage industry at least, Darling’s first Budget offered nothing to get ex-cited about.

“There was little of substance for the housing or mortgage markets in this Budget,” says Michael Coogan, director-general of the Council of Mortgage Lenders. “While there may be benefits in the longer term, the chancellor ignored the pressing nature of some of the issues facing the market.”

Darling, clutching the briefcase used by William Gladstone in the 1860s, began his Budget delivery by assuring the House of Commons that the economy will grow throughout this year and beyond.

Putting a positive spin on the events of the past few months, Darling claimed the country was resilient and ready to deal with global financial shocks.

“This Budget is about equipping the UK for the times ahead,” he told a packed chamber.

But mortgage industry experts say there is much more he could have done. The industry was waiting with bated breath for Stamp Duty reform to help first-time buyers, but no such luck.

Instead, Darling announced a mi-nor change, making homes in shared ownership exempt from the tax until borrowers own 80% of their properties.

“We are disappointed to see that the only change made to the Stamp Duty threshold involved shared ownership schemes,” says Paul Chafer, commercial director at Stroud & Swindon. “Stamp Duty must be bought into line with house price inflation, starting with raising its threshold to £200,000.”

David Newnes, managing director of Your Move, agrees.

“The chancellor has ignored the need to boost the property market and that is a big mistake,” says Newnes.

“Many first-time buyers need to borrow more than the value of their homes to cover moving costs and Stamp Duty. If Darling had given them a holiday from the tax, the extra cost of buying property would have dropped significantly.

“He has failed to acknowledge the effect of the liquidity crisis on first-time buyers’ ability to borrow,” he adds.

But it wasn’t all bad news for first-timers. From April, they and key workers will be able to access improved shared equity schemes.

“Until now they were only available to those who could afford three-quarters of the price of their new homes,” Darling told the House. “I am extending the scheme to help those able to afford half of the price of their homes.”

While this is a step in the right direction, critics say it’s a case of too little, too late.

“Allowing eligible buyers to purchase only 50% of their property is a welcome recognition of the challenges first-time buyers face,” says Adrian Coles, director-general of the Building Societies Association. “But we expect demand to remain low, not least be-cause of the problems associated with saving for deposits.”

Darling announced that £8bn would be spent on affordable and social housing to meet increasing demand. This will enable the Housing Corporation to deliver 70,000 new affordable homes each year by 2010/11.

And like a dog with a bone, Darling once again advocated long-term fixed rate mortgages, despite the industry backlash last time.

“I want more people to have the choice of long-term fixed rate mortgages,” he told MPs. “They protect borrowers from risks and still allow them flexibility to move or get new mortgages if rates go down.

“Today, most people in the UK have short-term fixed rate mortgages for two or three years, leaving them exposed to interest rate rises when their deals end.

“This is not the case in other countries such as Denmark, where the ma-jority of home owners take out long- term fixed rates,” he added. “I want to see more flexible and affordable long-term fixed rate mortgages for 10, 20 or even 25 years.”

Unsurprisingly, industry experts still doubt the efficacy of his proposals, at least until the government canfind a way to make long-term deals more profitable for lenders and better suited to consumers.

“The question the chancellor has to address is the way we live now,” says Andrew Montlake, partner at Cobalt Capital. “Twenty-five-year fixed rate mortgages are not suitable for most of the population because of the flexible way Brits live.

“They can’t afford to be tied down to a single lender – just look at the number of divorces and people moving be-tween cities, as well as changing working practices.

“There are some long-term fixed rate mortgages available already and the reason there aren’t more is lack of demand,” he adds. “If there was more demand for long-term fixed rates deals, lenders would respond.”

Francis Ghiloni, marketing and business development director at, agrees.

“Certainty about payments may be a good thing but borrowers should think carefully before committing to 25-year deals,” he says. “The industry does not share Darling’s love of them.”

Landlords had some good news as Darling confirmed his proposed change to Capital Gains Tax, which will come into effect next month.

“This will benefit over 80,000 businesses and investors in the next 12 months,” says Darling. “Some 90% will continue to pay CGT at 10% – one of the lowest rates in the world.”

Although expected, the National Landlords Association welcomes the changes.

“Landlords looking to sell will be pleased to hear changes to the CGT re-gime will go ahead,” says David Salusbury, chairman of the NLA. “Landlords who want to release equity from their portfolios will only pay a flat rate of 18% on capital gains.”

Nevertheless, Darling comes in for criticism for not going far enough.

“It’s a pity the chancellor didn’t take this opportunity to include landlords in entrepreneurs’ relief, which would have cut the CGT rate to 10% for the first £1m of gains,” adds Salusbury.

With caution the main theme of the Budget, it’s not surprising that Darling advocated saving.

He raised the annual ISA investment limit to £7,200, with the amount that can be held in cash increasing to £3,600. He also announced a savings gateway scheme.

“These reforms are a step forward for savings,” says Tony Vine-Lott, di-rector-general of the Tax Incentivised Savings Association. “They will en-hance an ISA regime that has found favour with 18 million consumers.”

After months of ridicule, the Budget offered Darling a chance to silence his critics. Instead he chose to play it safe and by doing so played into the hands of his detractors.

It was a lame duck Budget from a lame duck chancellor. And after a bland 52 minutes, one suspects the industry agrees.

CML calls for Stamp Duty to be reformed

Mortgage market statistics

  • Number of UK households with mortgages – 11.8 million.
  • Number of first-time buyer mortgages in 2007 – 357,500.
  • Average first-time buyer mortgage (January 2008) – £115,000.
  • Number of mortgages to home movers in 2007 – 658,300.
  • Average new home mover mortgage (January 2008) – £134,100.
  • Average mortgage for house purchases (January 2008) – £125,000.
  • Average outstanding mortgage – £100,458.

Stamp Duty statistics

  • Tax yield from residential Stamp Duty in 1996/97 – £675m. In 2006/07 – £6.4bn.
  • Number of borrowers who paid Stamp Duty in 2007 – 782,000.
  • Nearly 80% of residential Stamp Duty revenue in 2006/07 was raised from those paying higher rates.
  • Proportion of first-time buyers paying Stamp Duty in January 2008 – 61%, up from 47% two years earlier.
  • Proportion of first-time buyers paying higher levels of Stamp Duty in January 2008 – 11%, up from 6% two years earlier.
  • Current zero rate threshold for Stamp Duty – £125,000.
  • Zero rate threshold if it had been indexed to house price inflation since 1997 – £171,000.

Long-term fixed rate mortgages

  • Some 3% of mortgages in 2006/07 were fixed for 10 years or more.
  • Some £30bn of lending, or 2.5% of the total, is on long-term fixed rates.
  • The Financial Services Authority’s comparative table shows 27 firms offering 92 long-term fixed rate products to low LTV remortgage customers. Of these, only four offer 25-year deals – seven products in total.
  • The proportion of outstanding mortgages on 25-year rates is likely to be small.

The Council of Mortgage Lenders advocates an immediate increase in the zero threshold of Stamp Duty to £250,000, at an estimated cost of £1.2bn per year. This would support first-time buyers and help to underpin wider housing market confidence.

Industry hopes for Budget 2008 and reactions to Darling’s measures

Andy McQueen is managing director of The Mortgage Works
Prediction: Given Alistair Darling’s first nine months in office have been so torrid, he has a lot to prove with his first Budget, which he will be hoping receives a warmer reception than his pre-Budget report.

The likelihood is that he will take a step back from some of his more unpopular pledges, including changes to taxes on non-domiciles. He may also defer proposed changes to business taxes.

Many in the mortgage industry will be interested in his recently announced gold standard initiative, although the change landlords would most like to see – buy-to-let investors having access to entrepreneurs’ tax relief – is unlikely to happen.

Reaction: The Budget proved to be an uneventful affair for the mortgage industry, with the chancellor covering old ground on long-term fixed rate products.

As predicted, he stepped back from the controversy surrounding non-doms by pledging no further changes.

Simon Burgess is managing director of Britishinsurance
Prediction: It is unlikely there will be much to welcome in the Budget. Stamp Duty won’t be changed and Inheritance Tax thresholds have already been set for the next few years.

Prime Minister Gordon Brown has made it clear that child poverty is his priority and spending on other social problems such as street crime will feature highly too.

The financial markets will have little to sing about.

Reaction: The chancellor did not approach the Budget from a position of strength so it was never likely he would offer anything radical.

More access to shared equity schemes for key workers is welcome and the concession on Stamp Duty for shared ownership properties will help too.

But more dramatic changes to the tax would have been better.

The talk about long-term mortgages was familiar. They are not the answer for most clients and in short, this Budget offers little of substance to the industry.

Brian Murphy is head of lending at Mortgage Advice Bureau
Prediction: With recent structural changes in the mortgage market, it’s important for first-time buyers that Stamp Duty is reformed – an issue the Budget will hopefully address. Its threshold should be raised or the tax should be abolished for first-timers. Its structure is outdated and unlike any other tax, it penalises home owners depending on where they live.

The Budget may address Stamp Duty but I fear it won’t do enough.

Reaction: While I was not expecting a comprehensive overhaul of Stamp Duty, it’s disappointing to see that the government has failed to grasp the nettle again. The only relief has been provided to key workers taking out shared equity schemes. Even then, they are only exempt from the tax until they own 80% of their homes.

This will help only a minority of consumers and it remains to be seen how the government expects first-time buyers to cope.

Danny Lovey is principal of The Mortgage Practitioner
Prediction: If ever there was an opportunity to ease the burden of Stamp Duty, it’s now. The system is not only unfair, it also distorts house prices. I’d suggest zero duty to £250,000 and 1% above this threshold.

I expect Darling to make an announcement about the liquidity crisis and for him to improve the market in covered bonds. He may even talk about setting up a government agency similar to the US’ Fannie Mae and Freddie Mac.

Reaction: The chancellor is in a world of his own. He talks about the liquidity crisis as if it were an issue that does not require urgent attention. The working party to ease liquidity problems is something that should have been established already. He is fiddling while Rome burns.

Instead of urgent action, we’ll have a report in the summer and proposals in time for the next pre-Budget report. And his insistence on long-term fixed rates could be a mis-selling scandal in the making.

Anthony Rafferty is head of marketing at Norwich Union
Prediction: Following the chancellor’s changes to Inheritance Tax allowances in last year’s Budget, I hope this year will see further reforms in this area.

Big house price increases in recent years must be taken into consideration and I hope to see the IHT threshold raised even further in line with house price inflation.

Pension provision must be bought into line with inflation to ensure pensioners are protected. There’s huge scope for improving the quality of life for the elderly and the government has an important part to play.

Reaction: It’s great to see that the chancellor put forward a number of measures to help pensioners. The rises in winter fuel allowance will undoubtedly help the over-60s.

And pension credit now guarantees pensioners a weekly income of £124, which should help the over-65s. But more could be done to ease pensioners’ financial burden.

Steve Walker is managing director of Promise Group
Prediction: Either the chancellor ignores his predecessor’s golden rule and runs the economy at a deficit or he must increase taxation. If he opts for the latter he may increase National Insurance contributions from 1% to 2% on earnings over £40,040.

Some people still see NI as a method of saving for their retirement, which makes it the ultimate stealth tax.

Darling may also opt to tighten up benefits provided by employers and I expect developments in the green arena.

Reaction: In what was a tame Budget, the chancellor put green taxes and big rises in the duty on alcohol at the forefront of an agenda severely constrained by worsening public finances.

Predictably, Liberal Democrat leader Nick Clegg has criticised it for being a cop-out on green issues. He says the chancellor is using environmental taxes such as measures to penalise polluting cars to take more from the lowest earners. I thought expensive cars caused most pollution.

David Hollingworth, London & Country
Prediction: It’s not likely that Alistair Darling’s big day will ease the pressure he’s under but let’s hope he has something up his sleeve. We may hear more about long-term fixed rate mortgages and moves to bolster their funding.

We should also get more information on the gold standard aimed at injecting some life back into the market. I expect we will hear about new options for key workers as HomeBuy seems ripe for a makeover.

We keep waiting for an overhaul of Stamp Duty but I’m not holding my breath.

Reaction: This Budget failed to throw up any big surprises. As far as housing goes, long-term fixed rates came up again, but further consultation will be required to make them work.

HomeBuy got a facelift with the Co-Operative Bank now the only lender involved. The likes of Nationwide must be wondering what they did wrong.

Sadly, Stamp Duty wasn’t overhauled, with only a limited change for shared ownership schemes.

Mortgage Strategy
Prediction: This Budget is bound to spell bad news for those of us who like the odd drink. Wine will rise by around 14p a bottle, beer by 4p a pint and whisky by 55p. Smokers will be hit hard too with an 11p rise in duty on packs of 20 cigarettes and 4p on cigars.

First-time buyers won’t get the Stamp Duty relief they deserve but shared equity home owners will be made exempt from the tax until they own something like 80% of their properties. Darling will continue flogging the dead horse that is long-term fixed rate mortgages and the public will be encouraged to save.

Reaction: Wow, we knew we were good but that’s amazing. Talk about a sixth sense. And we knew Bruce Willis was a ghost too.


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