Personal finance: How the house market lost its Miras touch

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The Independent Online
The cut in Miras from 6 April will cost the average homeowner pounds 10 a month. But, 10 years ago, another change had far more dramatic consequences. Paul Slade turns the clock back

Mortgage interest relief at source - Miras for short - is now of little value to homeowners, and a popular target for chancellors who want to raise revenue at minimal political cost.

We already know that the rate of Miras relief will fall on 6 April - the new tax year - from 15 per cent to 10 per cent, saving the Government about pounds 750m a year. Miras is generally agreed to be on its way out, and Gordon Brown may have further cuts to announce in his 17 March Budget. But it was the Conservative chancellor Nigel Lawson's 1988 Budget which brought high drama to the subject.

As 1988 began, the property market looked - to use a phrase from that era - unassailable. The year started with the average London house worth pounds 81,452, up an astonishing 50 per cent on the figure just two years earlier. Buying property looked like a sure way to make money. Many young people, fearing it might have been their last chance to get on the property ladder, clubbed their wages together and borrowed to the hilt. Lenders, desperate to maintain their market share, fell over themselves to accept business they would not even consider today.

Ian Darby, of independent mortgage advisers John Charcol, says: "It was an extraordinary period. House prices were steaming ahead and the only way it was affordable to buy for a lot of people was to join up as couples or join with friends.

"What it did was draw a lot of people into the market who weren't ready for home ownership. There were a lot of people with no savings and no history of affording large debt repayments. At that time you could have sold mortgages with a sandwich board on your back."

In this already feverish atmosphere, Lawson decided to give the pot an extra stir. He announced in his April 1988 Budget that - from 1 August that year - two unmarried buyers purchasing a house together could no longer both claim Miras. Instead of applying to each borrower individually, the relief would apply to the single property they were buying. The same principle applied to a group of buyers sharing ownership of the house.

Miras then was worth a great deal more than it is today, as it was set at the borrower's highest tax rate - 40 per cent in the case of higher earners.

For two 40 per cent taxpayers with a pounds 60,000 mortgage loan at a rate of 10.5 per cent, the immediate effect of the change was to increase their mortgage bill by pounds 1,260 a year.

Not surprisingly, there was a mad rush to complete mortgage deals in the four months Lawson had left for action.

Philip Cartwright of London & Country, another independent mortgage adviser, says: "It was one of the worst decisions ever made regarding the housing market, and to give people more time to do it just fuelled the fire. A snap decision would have been better.

"The housing market was already a disaster waiting to happen - because it just was not sustainable. You were getting five people who hardly knew each other buying a property together so they could borrow pounds 150,000, and building societies falling over themselves to lend. It was a catastrophic decision."

In the six months to 30 September, 1988, the price of the average London home rose from pounds 82,886 to pounds 93,681 - an increase of 13 per cent. But, as the August deadline passed, and interest rates started their climb to 15 per cent, buyers found the rug whipped out from under them. Higher interest rates led to a plague of defaults, and new buyers were nowhere to be found.

The capital was hardest hit, as it was here that the housing boom had been most pronounced. London's average house price peaked at pounds 97,667 in 1989 but, by the end of 1992, had fallen back to just pounds 66,573. Many borrowers who took out large loans in 1988 found themselves in negative equity for many years later. Some will still be suffering from black marks on the credit records today.

In his memoirs, The View From No 11, Lawson accepts the delay between announcing and implementing the change was wrong. But he blames the Inland Revenue for telling him lenders would be unable to reprogram their computers without adequate warning.

With five interest rate rises in the past year, some think Brown will hold off on any further cuts in Miras until next year's Budget.

Abolishing the relief altogether would cost borrowers only about another pounds 20 a month on what they will pay from 6 April onwards. But Lawson's changes to Miras of a decade ago are an eloquent lesson that even innocent-looking Budget changes have concrete and unpredictable effects in the real world.

What to do if you're worried about Miras

Most borrowers could get a better deal by shifting their loan to another lender, saving far more in the process than they will lose through Miras.

Smaller building societies such as National Counties or Stroud & Swindon have to offer rock-bottom rates in order to compete with giants such as Halifax or Nationwide. Often, they will also pay fees for you, such as valuation fees. House prices in the UK have risen by an average of 13 per cent in the last year, making remortgaging possible for many homeowners who could not have considered it 12 months ago.

Philip Cartright says anyone who is on their lender's standard variable rate, has been with that lender for three years or more, and whose mortgage is less than the value of their property, could almost certainly save by remortgaging.

If remortgaging is not possible for you, and you think you will have genuine difficulty finding the extra pounds 30 as month or so that the loss of Miras will cost you, it is better to tell your lender so now. Making special arrangements to meet the loan will dent your future credit record, but better that than simply running into arrears.

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