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Long-term commitment

  • 05/06/2003
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The latest Budget has precipitated a sea change for the mortgage industry, with the Chancellor keen to move towards long-term fixed rates

In what has been described as a ‘thin’ Budget by some financial commentators, it nevertheless raised a number of important issues for those involved in the housing market.

Chancellor Gordon Brown’s latest Budget gave a clear indication that the Government is gearing up to take a greater interest in the mortgage industry as he referred to its importance in regard to the wider economy. In a turbulent global economy, Brown appears keen to protect the strong performance of certain key UK sectors, especially housing, however he warned the Government was taking steps to ensure the return to the boom and bust scenario which has characterised the market for decades will need to be controlled.

He used the Budget to announce plans to make housing finance more predictable and planning more flexible and, as such, he has commissioned Professor David Miles, from Imperial College, London, to investigate how Britain can grow the proportion of long-term fixed rate mortgages sold. His findings will be reported in next year’s Budget. With almost two thirds of mortgages being taken on a variable rate, and fixed rates generally being short-term deals, Brown said that he wanted to investigate the long-term fix market to protect people from any future rise in interest rates, which would make it harder for them to make mortgage repayments and stifle consumer demand. He hinted that the UK was moving closer to his five economic targets that will govern when there is a referendum on joining the Euro when he said that developing a market for long-term fixed rates was: ‘¦something that is important to the UK in or out of the Euro, and more important in a single currency arena.’

Commenting on this, Michael Coogan, director general of the Council of Mortgage Lenders (CML), warns the Chancellor may find it difficult to win over consumer opinion. He says: ‘Fixed rate mortgages give consumers greater certainty about their payments, but rates are typically higher because the cost of long-term funding to lenders is also higher. In the UK’s dynamic and innovative market, consumers often choose other products such as discounts and trackers. Essentially, the debate will be about whether cheaper funding can be achieved for longer-term fixed rates in the UK, while not losing the benefits of flexibility that appeal to UK consumers.’

Bill Dudgeon, managing director of The Mortgage Business (TMB), agrees, and hints that whatever the outcome of the study it will not necessarily convince UK lenders to change their offering. He says: ‘From time to time, lenders in the UK have offered fixed rate mortgages on terms of between 10 and 25 years. They have never proved very popular, mainly because they always look expensive compared to short-term deals.’

Brown was also keen to announce plans to improve planning and supply of housing to address supply and demand problems and reduce regional volatility. He announced the launch of new Regional Spatial Strategies, designed to promote macro-economic stability as part of sustainable development plans, and an investigation to examine whether Government objectives need to be enforced through a system of binding local plans. To this end, he has commissioned Kate Barker, from the Monetary Policy Committee, to conduct a review of the issues affecting housing supply in the UK.

Freezing Stamp Duty

One of the most contentious points in the Budget was the ‘freeze’ in Stamp Duty, which received mixed reaction from industry commentators. Ed Williams, managing director of property website, Rightmove, expressed disappointment that the Chancellor did not significantly alter the charge. He says: ‘With house prices increasing by 25% per year, not only is Stamp Duty charged on each transaction increasing by the same 25%, but many properties are moving into higher bands where much more Stamp Duty is payable.’

The decision is expected to impact on the first-time buyer market, as more houses will fall into the payable band causing the proportion of first-time buyers to fall further, which may have implications which affect the housing market as a whole.

Julie Westby, president of the National Association of Estate Agents (NAEA), says: ‘Currently, the average UK house price is £120,000 and has not been £60,000 since the middle of 1997. In other words, the freeze on Stamp Duty is really a tax rise ‘ and one which will now affect many first-time buyers who will find themselves immediately having to pay tax for their first property.’

Stamp Duty charges on both residential and commercial property have been held at either 1%, 3% or 4% of the property’s price, depending on its value. However, some revisions, such as an improved legal basis and greater enforcement powers will be introduced with the Finance Bill on 1 December 2003. The Treasury hopes that these measures will help to stop abuses in high value property transactions by expanding anti-avoidance plans that will discourage the transfer of property into companies (often through special purpose vehicles). Stamp Duty is charged on all residential properties worth in excess in £60,000, unless it is located in an exempt area.

The Stamp Duty plans may also prove damaging for many people with a commercial lease as it will remove the four varying charges on new leases and bring in a single rate that will value the rent payable over the term of the lease at a discount of its net present value (NPV). The single rate of 1% of the NPV of the rental payments will be charged where the NPV is greater than the zero rate band of £60,000 on residential property or £150,000 for commercial property. Accountant KPMG claims that this could increase the tax on the rental element of a typical 20-year lease by up to eight times, and up to 10 times for a 25-year lease.

With regard to commercial loans, the message was also negative. The Budget will cause lease duty to be paid up front on the entire present value of a lease from 1 December 3003, whereas at the moment duty is only charged on the average of one years’ rent. This could prove very expensive for those looking for longer leases and has been called a stealth tax by some. Tony Harris, partner at property consultant, Cluttons Commercial, says: ‘Imposing this increase in the current market will still have a negative effect on both UK businesses and the property sector. Cluttons produced figures which indicated that a business signing a 35-year lease at an annual rent of £150,000 would have to pay around £30,000 in tax in the first year, which is ten times the original amount.’

Islamic mortgages

Brown used the Budget to announce that the law will be changed so that those taking out an Islamic mortgage are not charged Stamp Duty twice. The law will come into effect on 1 December this year under measures addressed under the Finance Bill, and should aid the development of Sharia-compliant mortgages.

Under Islamic law the payment and receipt of interest is forbidden, but it can be circumvented if a financier buys the property and then sells it onto the buyer at the same price in return for installment payments, which then extend beyond the full repayment of the deal in lieu of interest payments. At the moment the problem is that ownership of the property is changed twice, once to the financier and once to the buyer. Andrew Buxton, former chairman of Barclays Bank, says: ‘The excellent work being done by the industry, regulators and Government departments to reduce the barriers to Islamic mortgages shows that where there is a will there is a way. We now look forward to the passage of the Finance Bill, which will pave the way for cheaper Sharia-compliant mortgages. This will help to make the mortgage market fairer and more accessible to the Muslim community in the United Kingdom.’

But Richard Doe, marketing manager at Kensington Mortgages, says the reform did not go far enough, and more detailed changes are still needed. He says: ‘There are other major issues that need to be addressed such as reducing the higher legal costs involved and ensuring that State assistance is available in the event of financial hardship as is the case for standard mortgages.’

The final area of concern for the housing market was inheritance tax (IHT). The Chancellor increased the level above which IHT is charged from £250,000 to £255,000. This has been criticised for remaining linked to retail prices and not taking account of the much greater increases in house prices. The increase amounts to less than 2% despite the fact that house price inflation was more than 25% last year.

David Bitner, head of product operations at The MarketPlace, says: ‘Rocketing house prices has meant increasing numbers of homeowners are now liable for IHT. As the value of more and more properties has swelled to over £250,000 those estates hit with a 40% tax bill has escalated substantially. At present some 25,000 households a year are affected but recent estimates indicate this could rise to as much as 2 million over the next 10 years.’

key points

The Chancellor wants to move onto long term fixed rates for the general good of the economy.

Freezing Stamp Duty may actually make it harder for first time buyers to enter the market.

Removing the double Stamp Duty Bill on Islamic mortgages should allow the sector to expand.


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