Budget 2008

Alistair Darling gave his first budget statement on Wednesday 12 March 2008. The chancellor's speech, full budget report and accompanying documents are all available on the Treasury's website.

The key points of interest to the lending industry are highlighted below, and our response to the budget statement is available here.

Housing finance review (budget report, chapter 5, paragraphs 5.33 – 5.36 & box 5.2)

In July 2007 the chancellor announced the Treasury would undertake a review of housing finance. The review report was published as an accompanying document to the main budget report, and sets out analysis and proposals on two key issues:

• the recent disruption in global financial markets which raises issues about liquidity and transparency in the mortgage-backed securities markets; and
• the low availability of affordable and flexible fixed-rate mortgage products which may help borrowers manage better the risks associated with housing finance. 

The key outcomes of the review are:

• Improving secondary market funding

The Treasury is establishing a working group to consider market-led initiatives to help improve liquidity in the mortgage-backed securities (MBS) market. The working group will include the mortgage industry, the investment industry, Treasury, the Bank of England and the FSA. The group will report initially to the chancellor in summer 2008 and present proposals at the time of the 2008 pre-budget report, but could move more quickly if a consensus is reached on the measures needed to revive the MBS market.

Despite extensive press coverage, there was no mention a 'gold standard'. The housing review document talks only of the government’s desire to “encourage industry to develop a gold standard market”. The Treasury has indicated that it intends to work closely with the CML and others going forward.

• Removing barriers to long-term, fixed-rate mortgages
  
  The government continues to believe that longer-term, fixed-rate mortgages could be of benefit, particularly to first-time buyers and low income homeowners. While the take up of these products has been low in the UK, the government points to other countries that have a high proportion of fixed-rate mortgages.
  
  The chancellor seems particularly keen on fixed-rate mortgages that do not carry early repayment charges, which are popular in Denmark and the US. He accepts, however, that lenders in the UK have limited means to manage the risk of these mortgages, and need to include early repayment charges to cover their costs.
  
  The government is inviting views on options for a UK framework to deliver more affordable long-term, fixed-rate mortgages, and the lessons to be learned from international markets and institutions. The government intends to work with a range of stakeholders and experts, and will provide an update at the 2008 pre-budget report in the light of their findings and stakeholder responses.
  
• Encouraging innovative mortgage products
  
  The housing review document also talks about the government’s desire to encourage innovative mortgage products. This covers areas such as shared equity mortgages, stand alone interest rate protection products and house price insurance. The government will work with private sector providers, and is willing to discuss ways in which it could help remove any potential barriers to the availability of these products. An update will be provided at the 2008 pre-budget report.

Arrears and possessions and sale and leaseback companies (budget report, chapter 5, paragraphs 5.30 – 5.32)

The budget report notes the recent rise in arrears and possessions. It recognises that there is statutory regulation and notes the FSA’s review of lenders' arrears practices which will conclude later this year.  The report also acknowledged our initiatives in this area:

“The Government welcomes the Council of Mortgage Lenders’ recent statement, which sets out the steps the industry is taking to help support borrowers facing repossession. These measures include working with debt advisers, pro-actively identifying at-risk borrowers and only repossessing as a last resort.”

There is no mention of changes to income support for mortgage interest (ISMI), but there is a reference (chapter 4, paragraph 4.14) to a comprehensive review of the working age housing benefit system to look at its effectiveness, particularly in promoting work incentives, efficiency and fairness, and to ensure that it represents value for money for the taxpayer.

Following our call for statutory regulation of the sale and leaseback industry, the Treasury has been conducting an internal review.  The budget report says that the Office of Fair Trading will lead a study of the market this year, focusing on consumers' experience of these arrangements, and consider options where appropriate to strengthen consumer protections. The study will draw on contributions from the FSA.

Affordable housing (budget report, chapter 5, paragraphs 5.44 – 5.46)

As part of the 2007 comprehensive spending review, the government set a target of 70,000 more affordable homes a year by 2010-11, including direct assistance to homebuyers through its shared equity and shared ownership programmes, which will help 25,000 households a year to enter home ownership. To deliver this, the Housing Corporation is undertaking a £8.4 billion investment programme over the next three years, the largest investment programme in its history, and recently announced the first £3.3 billion of allocations.

Budget 2007 announced the launch of a shared equity competition, which invited bids for a shared equity product to be delivered in partnership with government from April 2008. The aim was to encourage innovation and develop products that offer improved affordability and value for money. Two winning schemes – Co-operative Bank/Places for People group and Chase, a housing association consortium – have been selected from the proposals put forward, and will be made available to eligible households from 1 April 2008. The new products offer equity loans of up to 50% of the property purchase price, reducing the conventional mortgage required.

The Department for Communities and Local Government has also issued a press release on the new schemes.  The Co-operative Bank/Places for People scheme (Ownhome) will not require mortgages from other lenders.  The Chase scheme (MyChoiceHomeBuy) will provide an equity loan of between 15% and 50% alongside a conventional mortgage.

The government has also made changes to stamp duty land tax (SDLT) rules. Shared-ownership buyers will generally only pay SDLT on the final 20% of the property, unless they elect to pay SDLT upfront.

Financial capability and financial inclusion (budget report, chapter 4, paragraphs 4.26 & 4.27)

The government will implement the central recommendation of the Thoreson review of generic financial advice’s final report to launch a £12 million money guidance 'pathfinder' scheme in partnership with the FSA. Further details will be provided in the government's financial capability action plan later in the spring. 

On financial inclusion, the government will announce new terms of reference for the Financial Inclusion Taskforce in 2008-11, and appoint new members to the taskforce shortly.

Other financial and taxation measures

• The government will explore the case for additional targeted VAT measures for the refurbishment or renovation of dwellings that are of too poor quality to rent or sell – this follows the reduction in VAT on these costs for properties that have been empty for more than two years announced in the 2007 pre-budget report.
• SDLT exemption will be extended to new zero-carbon flats retrospectively from 1 October 2007, and the government will set out a definition for a zero-carbon homes by the end of 2008 following consultation in the summer.
• From April 2008 a national local housing allowance (LHA) will be introduced. This replaces current support for private sector tenancies with a flat rate allowance based on family size and area.
• A consultation will be published in the summer on simplifying and clarifying the tax treatment of dividends paid by real estate investment trusts (REITS) into share incentive plans (SIPs).
• Confirmation of the announcement at the 2007 pre-budget report that capital gains tax will be set at 18% for disposals on or after 6 April 2008, and the tax-free annual exempt amount for 2008-09 will rise to £9,000.

CML’s budget ‘submissions

Prior to budget day we published a special article in CML News & Views and undertook an interview with ePolitix, urging the chancellor to reform both stamp duty and state support for home-owners in difficulty.  

2007 pre-budget report

The pre-budget report and comprehensive spending review was announced by the chancellor on 9 October 2007. Our member circular highlights the key points of interest, and we issued a press release in response to the statement.