The mortgage industry, no stranger to government bailouts, is ready to put its faith in the beleaguered chancellor once more, although experience has taught us not to get our hopes up. Still, never ones to be labelled pessimistic, key players in the sector have come up with their Budget wish lists, identifying the most important points they hope Darling will address.
Of course, any scepticism would be well placed considering the lacklustre effort by Darling this time last year. He disappointed most of the country with a Budget that proved to be more of a tinker than an MOT.
The highlights of last year’s Budget included the decision to make homes in shared ownership exempt from Stamp Duty until borrowers own 80% of their properties and the move to spend £8bn on affordable and social housing – hardly achievements to write home about.
First-time buyers were once more shamelessly ig-nored. While Darling may be blind to the fact that without new blood the housing sector will continue to suffer, the mortgage in-dustry is certainly not. And it’s there that we begin this year’s wish list.
First-time buyers were once thought to be the most important component in the mortgage industry. Lenders were fall-ing over themselves to offer products that would entice even the most sceptical first-timers onto the housing ladder.
Then the credit crunch hit, lenders retreated into their shells for cover and first-time buyers were left out in the cold. The mortgage industry is hoping this year’s Budget will do something to bring fresh blood into the housing sector.
Graham Toy, head of commercial and intermediary lending at Norwich and Peterborough, says tax incentives could be the answer.
“The Budget should offer help for first-time buyers, with tax incentives to encourage purchasers into the market and generate confidence in the property sector,” he says.
Peter Welch, head of sales and distribution at Bridgewater Equity Release, agrees that something must be done to encourage first-time buyers but also to instil confidence in lenders to lend to them. He recommends introducing a government-backed deposit guarantee scheme for first-time buyers.
Melanie Bien, director of Savills Private Finance, says it is the lack of funding that is causing the problem for first-timers and the government should address this.
“There must be more assistance for first-time buyers,” she says. “They have all but disappeared since high LTV deals dried up. I’d like to see more affordable funding or the reintroduction of mortgage indemnity guarantees, sponsored by the government.” Grant Stevens, managing director of Leadbay, says the key to recovery is tax breaks, not only for first-time buyers but also for the lenders that provide them with mortgage products.
“I’d like to see tax relief for first-time buyers for the first three years of their mortgage to get the market moving,” he says. “The government could do this in a joint initiative including a tax break for banks that offer first-time buyer mortgages.”
Phil Whitehouse, head of The Mortgage Alliance, is also hoping for government intervention.
“It is certainly not a new wish but first-time buyers need more help getting onto the property ladder,” he says. “For this to happen Stamp Duty limits need to be raised significantly. An increase in government-backed schemes to help first-timers raise deposits would also be useful. One way of realising this could be by relaxing the rules for shared equity schemes.”
Stamp Duty is a major bugbear for the industry. The unnecessary taxation of struggling borrowers is thought to deter buyers and many professionals are calling for an overhaul of the system.
“The government must extend the Stamp Duty holiday for properties costing less than £175,000,” says Neil Johnson, mortgage policy adviser at the Building Societies Association. “It should do this while it sponsors research into how the system could be reformed to reduce distortions caused by the current slab structure of the tax that results in the bunching of transactions at prices just below thresholds.”
The Stamp Duty relief for buyers involved in shared ownership schemes announced in last year’s Budget barely skimmed the surface of the problem. According to Julian Sampson, partner at solicitor Wright & Wright, a revamp of the system could give borrowers significant savings.
“With the average property price in the current nil rate threshold being £175,000, the period of exemption should be extended beyond September and also increased so it hits the next barrier at £250,000,” says Sampson. “This could take £2,000 out of buyers’ required budgets.”
Nicholas Leeming, major client director at Propertyfinder.com, says this Budget is an opportunity for the government to make a meaningful change.
“With the housing market now yielding so little to the Treasury, this is a golden opportunity to soften the cudgel of this iniquitous tax without affecting the overall tax take significantly,” he says. “We don’t want another Stamp Duty holiday announcement – we need a more radical and imaginative move that will tempt first-time buyers back into the market and increase housing transactions – they are the lifeblood of the market.”
Of course, Stamp Duty or no Stamp Duty, potential buyers will not be able to get on the property ladder until LTVs rise. Earlier this year Prime Minister Gordon Brown announced plans to scrap 100% LTV deals. At the moment you’d be hard pushed to find any to scrap but if high LTVs become a thing of the past you can bet your bottom dollar first-time buyers will do too.
“We need to see the return of 95% LTV lending at reasonable interest rates,” says Rob Robert, senior adviser at Chesterton Grant. “I’d like to see the end of lenders profiteering at the expense of consumers just to recoup the losses they incurred by their previous poor practices.
“I want to see the Financial Services Authority making lenders treat customers fairly and offer rates that are in line with consumer expectations instead of punishing brokers who are doing all they can to keep the industry afloat.”
Katie Tucker, technical manager at Mortgageforce, believes a subsidy to insurance firms to facilitate an affordable MIG policy for lenders could be the answer.
“One obvious solution to lenders’ resistance to high risk lending above 85% LTV would be to reinstate the guarantee or high lending charge that used to mitigate their risk,” she says.
“But it’s a matter of funding. Previously, the premium would be a few thousand pounds paid by the borrower and added to the loan combined with a little from the lender. This would cover the risk of the value of the property falling and the statistical chance of that loan turning into a repossession.
“But now the risk is so high that insurance companies would have little interest in providing such a policy for lenders,” she adds. “Even theoretically the price and terms would be such that borrowers may as well use any cash they could gather for higher deposits. If the government could provide a guarantee to insurance providers, insure the lenders themselves or even offer an investment vehicle of sufficiently high guaranteed return in which insurers could invest their premiums and thus make offering a policy financially viable, the MIG scheme could be resurrected.”
Alan Cleary, managing director of Exact, would just like to see funding flow again.
“I wish Brown and Darling would give me £500m to lend to home owners,” he says. “I’d guarantee that 100% of the funds would be lent out rather than throwing it at banks and hoping they lend it rather than hoarding it in their vaults.”
Of course, one way to increase liquidity in banks is through savings but with the Bank of England base rate at 0.5%, putting money in a regular savings account is hardly tempting.
Bill Warren, managing director of Bill Warren Compliance, says the government should introduce tax incentives for savers that would get more individuals to save and thus generate more mortgage funding.
With unemployment rising and repossessions following suit it is no surprise that much of the industry is calling on the government to persuade borrowers to take out payment protection insurance.
“The government should identify ways in which home owners can be encouraged to take out mortgage payment protection insurance to give them greater certainty in these difficult times,” says Johnson.
Stevens agrees, adding that he would like to see the Budget encourage everyone to take out income protection by offering tax cuts for those who do on the basis that the state would pay out less if they lost their job.
“And I’d like to see the same for critical illness cover,” he adds.
Unsurprisingly, many in the industry are calling for Home Information Packs to be scrapped – ‘many’ meaning everyone bar those working for HIP providers. The consensus in the mortgage industry is that never has a government flogged such a dead horse for so long.
“I’d like to see HIPs removed,” says Bien. “Widely regarded as a waste of time because they don’t include surveys, they will stall an already slow housing market.”
Inheritance Tax, another thorn in the side of consumers, should also be rejigged, says Sampson.
“IHT burdens more estates than it needs to and creates lengthier probate matters as a result,” he adds.
“With the majority of taxable estates being charged simply by virtue of their family homes I would also like to see the Capital Gains Tax principal private residence exemption applied to IHT.”
Leeming says that another welcome change would be to exempt the main home of residence from IHT.
“Allowing inheritance to be passed through the family and used to buy homes the government would be useful,” he says. “The market would benefit from getting more people in at the bottom.”
Since getting funding from pretty much anywhere is like getting blood from a stone, home owners may be looking at equity release as an option.
Simon Little, business development director at Home & Capital, says he would like to see the government acknowledge this.
“I’d like equity release to receive its fair share of the money the government has injected into the banking system so it can meet the growing demand from elderly home owners,” he says.
“It would be short-sighted of the chancellor to ignore the importance of the equity release sector. It has a role to play in easing the burden on the state coffers in terms of retirement income and benefits. I’d also like retired home owners to be allowed to enter into equity release plans without this affecting their benefit rights for the first £5,000 per year.”
And there you have it. The industry’s wishes that Darling may grant on Wednesday. Optimistic? Maybe, but as a wise man once said – without hope, life is meaningless.
Reform Stamp Duty and boost the supply of mortgages
The National Federation of Property Professionals is calling on the government to implement certain measures to support home ownership.
It says Stamp Duty distorts the housing market. The way in which the tax is levied – the slab structure – leads to a sharp rise in the amount of duty payable as the price of a property moves from one band to the next. For example, if a home moves beyond £250,000 the duty jumps from just 1% to 3%.
Stamp Duty places a disproportionately heavy burden on first-time buyers, which is of particular importance in the current climate where new buyers are finding it difficult to gain a foothold on the housing ladder.
The NFOPP is calling on the government to take decisive action on the duty, which effectively acts as a tax on aspiration. It says the government should consider abolishing the measure outright or:
Lack of mortgage finance is significantly hampering the supply of, and access to, mortgages. In his review of the market last November Sir James Crosby set out a case for intervention in mortgage finance markets.
The NFOPP is calling on the government to implement all his recommendations to ensure those who want to buy houses can do so.
First-time buyers are central to a properly functioning housing market and the lack of finance is particularly affecting this group. High LTV mortgages are being withdrawn and the consequent rise in deposits required means it is becoming increasingly difficult to get on the ladder.
The NFOPP is urging the government to encourage lenders to provide high LTV mortgages. It recognises that these deals carry additional risk for lenders so it wants the government to promote the use by lenders of mortgage indemnity guarantees on properties with high LTVs.
The organisation is also calling on the government to look at the viability of running a state-backed MIG scheme for lenders.
Tackle wider market problems
So what would be good for the mortgage industry? It depends on who you ask. But rather than focussing on issues such as bigger proc fees and 95% LTV lending as far as brokers are concerned and everyone having 50% deposits and borrowing 1 x income as far as lenders are concerned, we ought to be looking at broader issues that will benefit our industry.
The first thing on our wish list should be for confidence to return in all camps. In this regard, consumers seem to be leading the way. The Building Societies Association’s latest Property Tracker survey captures the mood of consumers.
Its findings include the fact that consumers believe house prices will continue to fall in the next 12 months, but the median prediction of the rate of decline has slowed from 8.6% in December to 6.1% in March. Significantly, 54% believe now is a good time to buy compared with only 27% in June 2008 – the first positive sign in a long while.
Nevertheless, the perceived barriers to purchasing property are lack of job security, access to a large enough mortgage and raising a deposit, in that order. This shows that consumers are generally ready and willing to buy but not necessarily able.
With this in mind, the next thing on our wish list should be for lenders to get their act together and decide what they want to do. At the moment they seem to be behaving like pack animals, not knowing whether to distribute direct or go through brokers while they continually change policies and criteria.
The recent debacle with Abbey and John Charcol where Abbey was accused of culling pipeline business for less than apparent reasons and John Charcol of turning its back on the lender on Treating Customers Fairly grounds is a case in point.
The third thing on our wish list should be for the government and the Financial Services Authority to keep a cool and level head. We have witnessed too many knee-jerk reactions throughout this crisis.
While the government has finally decided to guarantee toxic loans to encourage lending, it would do well to create and promote a well-defined policy to help individuals who are fearful of borrowing due to their number one concern, job security. This could be in the guise of another guarantee but this time for borrowers. It’s all very well encouraging lenders to lend but for them to do so borrowers have to borrow.
Ultimately, we need all camps – consumers, advisers, lenders, the FSA and the government – to engage with each other constructively so the fourth wish on our list should be for a concerted effort to share ideas and concerns openly.
There needs to be a better flow of mortgage funding
Intermediary Mortgage Lenders Association
From a housing and mortgage market perspective, the top priority for the Budget should be securing a better flow of mortgage funding through government programmes including asset protection and guarantee schemes and quantitative easing.
We need all these schemes to work and we also need greater clarity from the government regarding securing the flow of funds to the mortgage market. At the moment we have National Savings & Investments competing with savings inflows to lenders and instructions to local authorities to deposit short-term money with the government rather than building societies.
We also have a freezing out of specialist lenders and smaller societies. Along with pressure from the Financial Services Authority to increase reserves, this leaves lenders wondering what is expected of them.
The industry is keen to see the housing market stabilised. This will not only help borrowers and activity levels but also draw a line under existing exposures. It would be good to hear Darling give a clear steer on the future of funding levels and activity.
So first on the wish list, subject to increased mortgage funding, there is a case for extending and developing the Stamp Duty holiday that has been running for homes up to £175,000 since last September.
Stamp Duty is deeply unpopular and poorly structured. The holiday will end in the middle of what may be the start of the recovery. There is a strong argument for extending this and expanding it to include properties up to £250,000.
Second, it would be sensible for the government to announce a review of the state safety net for mortgage borrowers. What we have now is a scheme that has been adjusted in a variety of ad hoc ways.
We need a scheme that reflects modern realities. This is long overdue and if this government does not seize the opportunity the next government should.
Third, we have a confusing patchwork of policy and support around low-cost home ownership. Successive reforms have simply made the situation even more confusing.
Low-cost home ownership was last reviewed comprehensively in 2004, with the hope of bringing more cohesion to the programme. This has not worked and the government must revisit this policy, not least because of the radically changed context due to the recession.
Finally, consideration should be given to putting in place some sort of mortgage guarantee scheme. This would help both borrowers and investors and thus ease the flow of funds.
We would caution against major demand side measures if these are not balanced by policy in relation to supply and funding.
We must ensure the 800,000 empty homes in the UK are occupied
The Mortgage Practitioner
I enjoy working with young people to help them achieve their home ownership goals and have been frustrated by the lack of opportunities for them to buy homes recently. They may have the affordability but many don’t have the deposits. On the other hand, when they have deposits it’s likely that prices will have jumped away from them.
Meanwhile, the seeds of the next housing bubble have already been sown. The availability of new homes to match pent-up demand was well behind the curve even before the credit crunch and the planning system has not delivered the goods. In 2007 some 24,000 fewer homes were built than 10 years ago. And those that were built were mainly flats rather than the family homes that consumers want. There are approaching 800,000 empty properties in the country so the first thing must be to get these occupied by housing associations, government funding or any other appropriate means.
One of the main problems young people have is that living in private rented accommodation does not generally give security of tenure beyond a tenancy agreement. This is not the bedrock for stability that most consumers want, nor is paying the mortgage for their landlord most first-time buyers’ idea of fun or financial sense.
Shared ownership or shared equity schemes meet the needs of those who want to get on the ladder but cannot afford it. They also provide security of tenure.
Over the years I have dealt with many consumers who have used such schemes and noted that a lot go on to own the whole of their properties. This is normally those who have traditional houses rather than flats. And there’s the truth of the matter – most consumers do not see flats as long-term family homes and yet the government insists on building more, many of which are now lying empty in inner city burst bubbles and scams.
Existing government-initiated shared ownership and equity schemes are a hotchpotch. The funding for them is not sufficient and the number of lenders prepared to offer funding is limited. So what’s needed is less complexity but more funding.