§ '(1) If relevant loan interest payable by a qualifying borrower—
- (a) is payable under a loan agreement requiring combined payments, and
- (b) is payable to a qualifying lender who, in accordance with subsection (5) below, is specified for the purposes of this section, and
- (c) is interest on a loan made before 1st April 1983, or if it is interest in respect of which the Board have notified an earlier date to the lender under paragraph 2(5) of Schedule 7 to this Act, before that earlier date,
§ (2) Subsection (1) above does not apply to any combined payment unless—
- (a) the qualifying lender concerned has, in accordance with regulations, given notice to the qualifying borrower that this section is to apply to combined payments which the borrower is required to make under the loan agreement; and
- (b) the qualifying, borrower has not, in accordance with regulations, given notice to the qualifying lender that he wishes to continue with combined payments which, allowing for any sums he is entitled to deduct by virtue of section 25 above, do not exceed the combined payments which he would have been required to make but for the provisions of that section.
§ (3) Where subsection (1) above applies, the amount of any combined payment payable by the qualifying borrower concerned which includes a payment of the relevant loan interest shall be determined by the lender so as to secure, so far as practicable,—
- (a) that the principal and interest repaid over the period which is for the time being agreed between the lender and the borrower; and
- (b) that, unless there is a change in that period or in the basic rate of income tax or in the rate of interest charged by the lender, the amount of each net payment due from the borrower to the lender will be of the same amount;
§ (4) Where the qualifying borrower gives a notice under subsection (2)(b) above, the amount of any combined payment 693 payable by him which includes a payment of relevant loan interest and the period over which the principal and interest on the loan are to be repaid shall be determined by the lender so as to secure, so far as practicable, that, unless there is a change in the basic rate of income tax or in the rate of interest charged by the lender,—
- (a) the amount of each net payment, as defined in subsection (3) above, which is due from the borrower to the lender will be of the same amount; and
- (b) the amount of each such payment does not exceed what, apart from section 25 above, would have been the amount of the first combined payment payable by the borrower after the date referred to in subsection (1)(c) above, less tax at the basic rate for the year 1983–84 on so much of that combined payment as would have consisted of interest;
§ (5) A building society within the meaning of the Building Societies Act 1962 or the Building Societies Act (Northern Ireland) 1967 is by virtue of this subsection specified for the purposes of this section; and the Treasury may by order by statutory instrument specify any other qualifying lender or class of qualifying lender for the purposes of this section.
§ (6) The giving of a notice under paragraph (a) or paragraph (b) of subsection (2) above does not affect the right of the qualifying lender and the qualifying borrower to vary, by agreement, the terms on which interest or capital or both is to be repaid.
§ (7) In this section—
- "loan agreement" means an agreement governing the terms of payment of interest and repayment of capital of a loan the interest on which is relevant loan interest;
- "combined payment" means one of a number of regular payments which are attributable in part to repayment of capital and in part to payment of interest; and
- "regulations" means regulations made by the Board under section 27 below;
§ Brought up, and read the First time.
§ The Financial Secretary to the Treasury (Mr. Nicholas Ridley)
I beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker
With this it will be convenient to discuss Government amendments Nos. 50, 51, 53, 54 and 55.
§ Mr. Ridley
The amendments are consequential upon new clause 42 and amend clause 27.
The new clause is tabled in response to the arguments in Committee by the hon. Member for Islington, South and Finsbury (Mr. Cunningham) and others, who believed that the new arrangements for mortgage interest relief might put unfair pressures on existing borrowers. They were not happy about the letter which the Building Societies Association sent to some members of the Committee. The relevant sentence of that letter was:If a borrower would prefer to see his net payment held constant at its present level, then a society would be prepared to offer the alternative of having the mortgage extended".
§ Mr. Ridley
I shall be delighted to send the hon. Gentleman my copy. The letter is superseded by the new 694 clause. Following our debate in Committee, the Revenue and the Building Societies Association discussed the matter further and the new clause was suggested. The Government accepted the idea, although the new clause is almost 100 per cent. declaratory. It does not much change the law, but it makes clear the rights of both borrowers and lenders in relation to existing mortgages.
If there is no approach from a lender—and the clause is restricted to building societies in this context—the terms of an existing mortgage cannot be changed. If a building society wishes to write to a lender and suggest a change, if the borrower agrees, the change can take place. If he does not, the change does not have to take place.
The clause contains four options upon which the borrower and lender can agree. The first option is to accept the constant repayment system, which would mean a small increase in the annual payment in the early years, although probably less overall, discounting inflation. The second option is to stay with the present outlay and extend the mortgage term by a few years. That would result in a higher overall cost. The third option is to stay with the present outlay and later increase the repayment of capital so that the total mortgage is completed and repaid on the same time scale as at present. That amounts to remaining as at present. The fourth option is to adopt any other mutually agreed system.
The new clause meets the arguments in Committee. It will be a great help to existing borrowers to know exactly their rights and options, and I commend it.
§ Mr. George Cunningham
When we considered the issue in Standing Committee I asked that the new legislation in the Bill should not come into force until the Treasury had agreed with the building societies how the building societies would operate the scheme, and until they agreed to operate it differently from the way that they intended. I said then that the Government should put whatever pressure they could on the building societies to get them to do one of two things: either to get them to say that they would do what I have described—maintain a rising profile—or, failing that, to agree that if a person asked he could have an arrangement whereby he would pay no more in the first three years, as a first-time buyer, than he would pay under the present system. I acknowledge with pleasure that the Government's new clause meets not only that request but goes beyond it by doing more in respect of existing borrowers. That is a qualification to which I shall return later.
Without the new clause, the position would have been serious—and politically serious. It would have meant that the first-time borrower on a normal mortgage of £15,000 over 25 years at 13½ per cent. would have had to pay over 5 per cent. more net than under the old system. A 5 per cent. increase in net outgoings for a first-time borrower is not negligible. If the person could not afford it, the introduction of the new system, described previously as an administrative change, would have meant that, instead of being able to borrow £15,000 at a given outlay, he would have been able to borrow only £14,205.
For the existing borrower that would have meant that at the end of year 10 of a 25-year period on a £15,000 loan the change in the system next April would have negatived almost precisely the reduction in the interest rate from 15 per cent. to 13½ per cent. Under the old system, at the then 15 per cent. rate, the net monthly outgoing would have 695 been £141.79. When the interest rate fell to 13½ per cent., under the old system the net monthly outgoing fell to £130.41. With the change of system, without any change in the interest rate, the net monthly outgoing would have gone up to £141.26. The figures bear out my contention that the change in the system would for such a person have negatived the effect of a 1½ per cent. fall in the interest rate. The effect, although not so great, would have been as real for the average borrower at the end of year five of a 25-year period.
The change which is being effected—or, as the Minister would prefer to say, recorded, affirmed and publicised—is of real importance to the first-time borrower who has only just started a mortgage, and to a number of existing borrowers.
There is an element of obscurity, in my mind at least, because the Minister seems now to be saying that there would not have been any change in the incidence of cost on the borrower even without the new clause. He argues now that the arrangement which the building societies say that they would have operated could have operated only with the consent of the borrower. I can see that that might have been so, but it was not what the Government said at the time. The Government said that the way in which the new system was operated would be for the building societies to decide. They said that if the building societies wanted to operate it on a constant net cost basis they could. The Building Societies Association made it clear that its members proposed to operate it on that basis.
The discovery that the building societies would be able to do that only with the consent of individual borrowers is a new discovery since we debated the issue in Committee. At least it was kept quiet then, if the Minister was aware of it at all.
The disadvantage of the Government's proposal is that it applies only to existing borrowers. If the building societies intend to operate a constant net cost system, they are not required by the new clause to give it up in respect of any new borrower. A building society can say to a new borrower "The system involves constant net payments. You can take it or leave it."
The person who comes out best is the existing borrower. The person who does not benefit, at least by the terms of the legislation, is the new borrower—the person who does not yet have a mortgage. Yet it is the latter person whom we should be trying to help. It is the new borrower who works out the net burden that he can afford and therefore what he can afford to offer for the house.
It may be all right in the end. If the building societies are required by law—and in any case have agreed—to offer the four options to existing borrowers, in practice it may be that they will offer those four options to new and renewing borrowers. I hope so. If they do not, the new borrower, the person we are trying to help most, will not have an advantage from the new clause.
At present, building societies probably will offer the new options to new borrowers because the mortgage market is so competitive that attractive terms must be offered in order to get business at all. However, that will not necessarily last. We may revert to the situation when anyone wanting to borrow money to buy or improve a house has a hard task finding someone to lend it to him. It will be then that the test comes as to whether building societies are prepared to extend to the new borrowers the better conditions which will apply to existing borrowers.
696 I strongly hope that building societies, having been forced by discussion and legislation to go this far, will apply the better conditions to everyone. I express my appreciation to the Financial Secretary of the Treasury for his work in getting the building societies to go a long way further than they were prepared to go before our discussions in Committee.
§ Mr. Robert Sheldon
I welcome the new clause. Several disadvantages accompanied the new mortgage interest relief. As the hon. Member for Islington, South and Finsbury (Mr. Cunningham) pointed out, they were fairly serious disadvantages. However, the Government have gone a long way to meet some of the objections put forward, not least in regard to the first-time buyer as well as to others. They have allowed a wide range of options, such as constant repayments, the fixed amount due, the previously agreed term, and the permission to adopt any other arrangement.
The Government have done well to produce this solution to the problems that were brought forward and I welcome the new clause.
§ Mr. Ridley
I am grateful both to the hon. Member for Islington, South and Finsbury (Mr. Cunningham) and to the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) for their welcome of the new clause. They both acknowledge that the arrangements for existing mortgages are now clearly acceptable.
I can only take hon. Members through the argument that a mortgage arrangement is a contract between the borrower and the lender and neither can vary that contract except by mutual agreement. That was always the position and why I was, perhaps, more relaxed about it than was the hon. Gentleman. If it is helpful to clarify and spell out in legislation the points that I have made, let us always try to be helpful if we can.
It is not right to say that the building societies were grudging about this. Discussions were accompanied by the problems arising out of computerisation and the switch to mortgage interest deductions at source. It was not immediately apparent how best the problems could be handled.
Of course, we rely upon competition. As has been said, competition with the banks is effective. I was delighted to hear the tribute that was paid to competition. That is how the best service is provided and why the Government are so keen on competition in all its aspects. I should hate to think that competition in the mortgage market might dry up. If it did, we should certainly have to see how it could be restored. If a building society does not offer favourable terms, there is always a bank or another institution. That is the right way forward. Because of the presence of the banks, building societies will have to meet the competition and adjust to their customers' needs.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.