Budget 1999: Housing - Tax relief on mortgages is finally ended
Wednesday 10 March 1999
If interest rates remained at current levels the cost of mortgages of more than pounds 30,000 will increase by pounds 17.37 a month to pounds 347.50 on an interest- only loan at the Halifax's current standard variable interest rate of 6.95 per cent. On a three year fixed rate loan at 5.65 per cent the payments will rise by just pounds 14.12 to pounds 282.50 a month.
The additional cost has already been more than offset by the fall in interest charges, which in the last six months have reduced payments on the average mortgage by around pounds 75 a month.
Mortgage professionals generally welcomed the changes and played down the impact on borrowers. "Homeowners should not think about what they will have to cut down on but on how they can use the savings from falling mortgage rates to make their future more secure," Gareth Hoskin, director of housing markets at Legal & General said.
Hugh Jory, a partner at independent advisers Millfield said he was surprised the Chancellor had decided to go for abolition rather than a further reduction in the benefit but the change would simplify the job of explaining mortgage offers to clients.)
The impact will however be felt much more heavily in Northern England the Midlands, Wales and Scotland, where housing markets remain relatively depressed, the average house still costs under pounds 50,000 and tax relief is relatively more useful. "This will hit people with smaller mortgages the hardest. An extra pounds 17.25 means little to somebody who can afford a pounds 150,000 mortgage but it's quite another matter for somebody with a pounds 30,000 or pounds 40,000 loan, Paul Knight, general manager of the Cheshire Building Society said last night.
The Council of Mortgage Lenders also said the decision was unfortunate. "It is the equivalent of an 0.35 per cent increase in mortgage rates for the typical new borrowers in the UK", a spokesman said.
But David Fotheringham policy manager at the Chartered Institute of Housing welcomed the abolition of a subsidy to owner-occupiers and the publication of a Housing Policy Green Paper later this year, which he hoped would target support at low-income home-buyers similar to support already given to tenants. Phil Jenks, head of mortgages at the Halifax also hoped that the Green Paper would give something back to low-cost housing ownership including housing associations.
At the other end of the scale stamp duty has been increased from 2 per cent to 2.5 per cent on properties worth pounds 250,000 to pounds 500,000 and from 3 per cent to 3.5 per cent on properties over that level, payable on the entire purchase price, which raises the duty payable on a pounds 300,000 house to pounds 7,500. Up to 50,000 transactions a year will be affected, mainly in London and Southeast England.
The abolition of tax relief on mortgage interest marks the end of an era. It was deliberately used by successive post-war governments as a way of encouraging families to buy their own homes, reducing the cost of borrowing by about a third during the Sixties and Seventies.
But it has been widely blamed by academic economists and experts in the Bank of England for artificially inflating the value of property, creating a reservoir of unearned capital against which home-owners could borrow to finance consumer spending and stoking up inflationary pressures in the economy.
As long ago as 1974 tax relief on interest payments was limited to mortgage loans of up to pounds 25,000, which was still a considerable sum when the average home cost pounds 11,500 and the average mortgage was pounds 6,500. At the insistence of then prime minister Margaret Thatcher the ceiling was increased to pounds 30,000 in 1983 when the average house price had risen to pounds 29,500 and the average loan was pounds 18,000, and tax relief continued to be available to each individual borrower until 1988.
In March 1988 the then Chancellor Nigel Lawson announced that it would be restricted to one borrower for each property from August that year, triggering a last-minute rush to buy which aggravated a boom in property prices.
Total abolition will bring the Chancellor in only pounds 1.4bn in the 2000- 01 tax year, and cost borrowers a maximum of around pounds 200 a year.
Policy experts recognise that the concession has largely done its job. The proportion of owner-occupiers rose steadily from 55 per cent in 1980 to 66 per cent in 1990 but has since barely increased, and may have reached a natural plateau.
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