I am glad to have triggered this debate today, because in recent months we have witnessed financial turmoil both at home and abroad. Currently we are in a recession, with the outlook for 2009 and beyond being as uncertain as at any time since the last world war, which happened long before I was born.
I requested this debate today because I believe that its full title—the effect of interest rates on mortgage holders—covers much of what has been at the core of our economy for many years. What has been the aspiration of the majority of householders in the UK? It has been to become home owners. At the heart of the property-owning dream is the need for a system of finance that makes that dream a reality. In most cases, that means having access to a mortgage. Although having a mortgage and owning property is right for some, it is not right for all and for some people renting is the correct option.
The Chancellor's statement on Monday was designed to stimulate the economy and to turn around our economic fortunes. However, I would like to put it on the record today that I have no faith in that prescription to cure a country that has a sick economy. Cutting VAT to help people to buy imported products will not solve the problem. Investing in a new deal with public works programmes, including the construction of hospitals and schools and house building to help those in the construction industry who have been laid off might help. I accept that that was part of the Chancellor's programme. Investing in the infrastructure of the country, with the construction of a high-speed rail link, would not only produce jobs and boost the economy but would be good for the environment, by cutting down on polluting short-haul flights. However, before I digress on to a wider subject, I will return to the subject of today's debate.
In the last 25 years, much has changed. Interest rates have gone up and down, and house prices have generally only gone up, with a few exceptions. Conventional wisdom would have indicated that low interest rates would be good for mortgage owners and high interest rates would be bad. As I go into more detail in this speech, it will become clear that that is not necessarily the case.
Today we have falling interest rates, which are at an all-time low. The Bank of England base rate has fallen this month by 1.5 per cent. to 3 per cent, which is the lowest rate in living memory. Mortgage rates are also low. Why then has the housing market frozen, with sales and mortgages granted also falling to an all-time low, house builders being made redundant and even estate agents and lawyers involved in conveyancing going on to short time or losing their jobs?
Like many property owners with a mortgage, I believe that paying rent produces little or nothing at the end of the day. Although my mortgage produces the home over my head for myself and my family, it also produces something else, which is an asset to leave to the next generation. I have watched the value of the houses that I have owned in Edinburgh grow steadily in recent years and the mortgage rates that I have had were more than double their current level. While there was relative job security and a steady if not spectacular rise in property values, that situation was okay. The construction industry and building societies worked together effectively to produce a solid system of sensible lending, which produced stability at a reasonable price.
As well as the interest rates on mortgages themselves, other interest rates have a real effect on mortgage holders. The interest rates charged by credit card companies, or by banks for personal and business loans—
I am grateful to the hon. Gentleman for giving way. He was one of the supporters of my recent ten-minute Bill in the House, which aimed to limit the charges on credit cards. Does he still agree with that proposal?
The hon. Gentleman is one step ahead of me today, as I was about to congratulate him later in my speech for that Bill. No doubt he will agree with what I am about to say in this debate.
There is a credit card summit today, at which some of the issues that I have mentioned may well be addressed. Almost everything that is charged on anything that is bought can result in high, sometimes outrageous, rates of interest being charged. That can result in real hardship, misery or even worse situations for those who are paying those interest rates.
My own constituency is in Edinburgh, which is well known as a centre for banking and finance. In my constituency, I have the global headquarters of the Royal Bank of Scotland and there are many other people in my constituency who work for the Halifax Bank of Scotland and other employers in the financial sector. Much has been said about the problems facing the banking sector, from big City bonuses to the Government investing billions in banks to keep them afloat. I would like to be able to say that the banks have been prudent, have lent wisely and have been victims of the actions of others. Sadly, however, that has not always been the case.
I can give the example of a constituent who visited me at my advice surgery. He detailed how he was in debt, having lost his job, and he could not manage his debt repayments. He could not manage the debt that he had, yet he was lent a further £2,000 by HBOS at what appeared to be a reasonable 19 per cent. interest rate over three years. However, after other charges and insurances were added on, he was charged 75 per cent. interest on top of his original loan to clear his debt. He could not afford that and he should not have been given more money when he could not live within his existing means. What he needed was good financial advice, not a loan. However, I agree that it takes two. Borrowers should read the small print and, at times, just say "no" and do without the purchase.
A more extreme example of an individual facing higher charges that I discovered was that of Sharlene Britton. When she became the proud owner of a second-hand car, little did she realise that the total cost had more than tripled from the £7,000 for the car to £21,500 minutes before she drove it away. Sharlene had signed a credit agreement that included a loan with a massive 42.5 per cent. interest rate and payment protection insurance that cost more than the vehicle itself. It was those add-ons, coupled with the 42.5 per cent interest rate, that pushed the cost of her financial package sky-high. On top of the £7,080 sale price of the car, she agreed to pay £3,228 in payment protection insurance. However, because the cost of the premiums was added to the loan, which made it subject to the 42.5 per cent. interest charge, the figure swelled to £8,957. She then had to pay interest on the original price of the car, plus related charges, which pushed the total balance that she was expected to pay from £7,000 to £21,540.
Although that sounds bad enough, there are much worse cases. One of the most extreme examples that has been quoted in the press involved interest rates that worked out in excess of 2.6 million per cent. An example that I can give is that of a woman in York who took out a loan one week for £320 with the firm Early Pay Day Loans, which attracted 80 per cent. interest over seven days. When the cost of the credit was calculated over a 12-month period, the annual percentage rate of the loan worked out to be 2,639,385.9 per cent. Early Pay Day Loans was contacted and it insisted that its charges are "competitive".
From the basic 6 per cent. of a mortgage to 2 million per cent. interest, which I know is hard to believe, there is everything in between. The reason for giving these examples is to highlight the link between what we have at one end of the spectrum, which is a bank base rate at 3 per cent. and falling, while at the other end we have sky-high interest rates, which can undermine individuals and businesses who are doing all they can to survive.
I congratulate Mr. Devine, who has introduced a private Member's Bill for a maximum limit to interest rates. As a co-sponsor of that Bill, I wish him well.
Much of the personal wealth of the country is tied up in property. Millions of people are mortgage holders and pay interest, not only on their mortgage but on other loans. Properties are often used as the security for old age of those who have worked and paid for them during their working years. A property is often the single largest financial investment that most people will ever make and it should be secure. It is true that having money does not make people happy, but not having any money is guaranteed to make life much more miserable.
It is absolutely vital that the stability of the property market be restored so that millions of citizens and our economy as a whole can again return to a belief in a secure future; confidence is the key. Part of that process will depend on sensible lending at reasonable interest rates. I look forward to hearing from the Minister what he thinks can be done to curb the excesses in the market of extreme interest rates. That is now more important than at any other time in recent years as we now have a combination of factors, as well as those interest rates, which are affecting mortgage holders. The combination of high utility costs and increasing food and fuel prices is a recipe for financial disaster for many but, hopefully, utility costs have peaked and will begin to fall soon.
One group who are in a particularly perilous position are those who are currently unemployed with mortgages who receive mortgage interest relief. Their plight was brought to my attention by a constituent from Carrick Knowe who visited my advice surgery recently. I would like to thank her for alerting me to the problem. She outlined the impact that a fall in the base rate from 4.5 per cent. to 3 per cent. would have on those receiving mortgage interest relief, but who were paying a fixed rate mortgage.
I am sure that hon. Members will be aware that income support mortgage interest is designed to cover the cost of mortgage interest to ensure that families who may already be reeling from a redundancy are not also faced with the prospect of losing their home. Since
Recognising the urgency of the issue, I wrote last week to the Prime Minister and the Minister of State, Department for Work and Pensions, Mr. McNulty, who has responsibility for employment and welfare reform, to highlight the shortfall. Although I have yet to receive a reply from either, it was gratifying to note in the pre-Budget statement that the Government had indeed noted the problem and taken some action. The Chancellor's statement says that for six months, the level of interest rates covered by the scheme will remain, despite the base rate fall, at slightly more than 6 per cent. Will the Minister clarify whether that is for existing claimants only, or will it apply to new applicants?
Although the measure is to be welcomed, it nevertheless prompts the question of what will happen after six months. If the Government believe that the economy will have recovered in six months' time to a point at which interest rates will once again stand at 4.5 per cent., their optimism surely knows no bounds. In reality, it is far more likely that the economy will be in as bad, if not a worse, state by then, as yesterday's OECD report pointed out. The report indicated that interest rates will stay low, and they might even be lower in six months' time. At that time, people who depend on help to pay interest on their mortgage will see the cliff edge of support that they are on crumbling away beneath their feet.
To give hon. Members an indication of the potential scale of the problem, anyone who has taken out a mortgage in the last three years would not be covered by the scheme—it would not cover the interest on their payments. To be fair, the Government have not sat idly by while the situation has deteriorated. I welcome the extension in Government help for those people struggling to pay home loan bills, and the decision to start mortgage interest relief after 13 rather than 39 weeks is excellent news. Similarly, the fact that help will be available on mortgage amounts up to £200,000 rather than £175,000 will also be welcomed by many of my constituents.
However, with unemployment shooting up—it is now at an 11-year high and predicted to rise to 3 million by 2010—that will be a bigger problem in the coming months, as more people come to depend on Government help with their mortgage payments. The Government have bought themselves six months with this week's announcement, but I look forward to hearing from the Minister what plans they have to change the formula by which help is calculated, to ensure that the benefit more accurately reflects the help that families need. I hope that if the Minister is unable to answer those questions today, he would be good enough to write to me.
Looking to the future, we are faced with a set of circumstances such as I have never known. Base rates are low and they are predicted to fall again next year. Compared with other countries, our base rates could certainly fall further. As well as low interest rates, we have a frozen housing market, falling house prices, and the potential collapse of Northern Rock, and building societies that once gathered savings so that they could lend to house purchasers at reasonable rates are turning into banks and suffering from the same failings: reckless borrowing and irresponsible lending. Something that we thought was the prerogative of the foolish has become the accepted behaviour for the financial institutions that we have grown to trust for hundreds of years. That trust has been shattered and the outlook for many is bleak.
The current solution being put forward by the Government to the financial problems that fill the media every day is to provide a financial stimulus to the economy; to increase people's spending to kick-start the economy; and to put more money into people's pockets. I doubt whether that is actually the solution to the problem but, to give the benefit of the doubt to the Chancellor, even if it was, it could all be undermined if interest rates being paid by the public and businesses are not brought back to reasonable levels. If they are not, any increase in cash in the pockets of Joe Public will be swallowed up paying interest before he can spend it on goods and services. Unless mortgage holders believe that their property will hold its value and is worth paying for, the basis of domestic finance for millions could crumble. I look forward to hearing the Minister's comments on those issues.
I congratulate John Barrett on securing the debate and welcome the support he expressed for a number of elements of the pre-Budget report. I was disappointed that he was rather sceptical about the impact of the VAT reduction, but I simply refer him to the evidence given yesterday by the Governor of the Bank of England to the Treasury Committee, which was a fair and positive assessment of the impact that the announcement will have.
The hon. Gentleman is right to focus on mortgage lending; it is always an important topic, but especially in these difficult times. The interest rates charged by lenders will obviously have an effect on the affordability of mortgages and the ability of borrowers to repay. As he indicated, the Government have taken a number of steps to address the challenges as part of our comprehensive action to support the financial system in the UK.
The hon. Gentleman will be familiar with the broader programme, which includes the recapitalisation scheme announced in early October. In addition, a number of conditions have been applied to the public funding that is being invested in preference shares in Lloyds TSB, the Royal Bank of Scotland and HBOS. The banks have signed up to specific conditions, including on mortgage lending. For example, they have signed up to maintaining in the next three years the availability and active marketing of competitively priced lending to borrowers at 2007 levels. Copies of those agreements are available in the Libraries of both Houses, and UK Financial Investments Ltd, the new organisation, will monitor implementation of the conditions for the Government. The hon. Gentleman will be aware of the special liquidity scheme and the credit guarantee scheme. The latter offers up to £250 billion-worth of guarantees for new debt issued by participating banks.
The downturn is a global event, but its effects are being felt on a local scale. Home owners are finding it significantly harder, as the hon. Gentleman said, to remortgage their homes. That is the sharp end of the credit crunch—it is not bankers but families who feel the pinch.
It is not Government policy to influence the individual interest rate decisions taken by the Monetary Policy Committee. To do so would compromise the arrangements for independence that the Government put in place in 1997, which have worked well. To attempt to influence those decisions would squander the credibility gains of the arrangements.
However, from the beginning of the current financial turmoil, central banks around the world undertook co-ordinated action to help ease global monetary conditions. In the past few weeks, major central banks, including the Bank of England, the European Central Bank and the Federal Reserve, have announced co-ordinated reductions in policy interest rates, and extended their swap agreements. On
When I presented my ten-minute Bill I highlighted particular companies, as John Barrett has. Provident charged an interest rate of 183 per cent, and other companies were charging 432 per cent. and 9,885 per cent. None of those companies has reduced its credit card interest rates. We are doing a superb job of protecting hard-working families, but surely a cap on loans for credit cards, loans and suchlike should be part of the package.
My hon. Friend raises an important point, which the Prime Minister commented on in Question Time earlier today. The Government have considered a cap in law on a number of occasions. The difficulty that has always arisen is whether it should be illegal for somebody to borrow £20 on Friday on condition that they will pay back £25 on Monday. Of course, one could say that a friendly arrangement such as that would not be affected, but it is a difficult matter. I have not yet had the opportunity to study my hon. Friend's proposal, which I shall happily do, but it is difficult to frame legislation so as not to catch things that one would wish to continue to be permissible. He makes an important point about some very antisocial practices—or worse—in parts of the lending market.
There are good reasons why the business models of banks and other lenders have changed in the past year. Lenders face inaccessible and expensive funding. They are concerned about solvency and are trying, perfectly properly, to strengthen their balance sheets. In those circumstances, it is natural that they should be conservative about products and pricing and move away from higher-risk lending. Individual decisions about offering loans and the price of those loans need to remain commercial decisions for lenders.
However, banks are at the heart of our economy and need to play their part in helping the UK through these difficult times, and the Government are absolutely determined that they will. The recent cut in the base rate of interest announced by the Bank of England Monetary Policy Committee is having a positive effect on inter-bank lending and on credit markets more generally. As credit conditions ease, we should see the banks pass savings on to their customers. My right hon. Friend the Chancellor has met chief executives of the major UK banks to make that clear, and he reiterated the importance of that today in the House. Since his meeting with the chief executives, there have been some welcome announcements by banks on that front.
It is perhaps worth making the point that lenders fund themselves from a variety of sources, some of which have already reflected much of the fall in the base rate. Others, such as deposits from savers and market borrowing, are less directly affected. Ten major British financial institutions are now offering new standard variable rate mortgages that reflect the full 1.5 per cent. drop in the base rate. For existing mortgage holders, banks often have no leeway to offer lower rates. About 50 per cent. of mortgages are fixed, so by definition those customers will not have the cut passed on to them, and about 40 per cent. are trackers, so by definition those customers will. Banks have that discretion only in the case of the 10 per cent. of mortgages that are on standard variable rates.
The Government are absolutely committed to helping people who are struggling with their mortgages, and I am grateful to the hon. Member for Edinburgh, West, for acknowledging some of the announcements that have been made this week. In 2004, we extended the scope of the Financial Services Authority's regulation to cover mortgages. That ensures that borrowers are afforded important protection and have appropriate means of redress. The FSA will continue to keep under review its regime for borrowers, including those facing repayment problems. I suspect that the hon. Gentleman would agree that recent calls from some Members for mortgage regulation to be abolished now look rather ridiculous. It is absolutely clear that introducing that regulation was the right thing to do.
In addition, there is a commitment for the coming year by the major mortgage lenders on the lending panel—Abbey, Barclays, Bradford & Bingley, GE Money, HBOS, Lloyds, Nationwide, Northern Rock and the Royal Bank of Scotland—not to repossess homes within three months of an owner-occupier going into arrears.
In September, we launched a mortgage rescue scheme which will help up to 6,000 borrowers facing repayment difficulties to remain in their homes, and in the pre-Budget report, my right hon. Friend the Chancellor announced an extension to mortgage rescue to cover second-charge lending. The major mortgage lenders are committed to giving their full support to mortgage rescue products, including shared equity.
The Government also provide direct support to individuals—the hon. Member for Edinburgh, West raised this point—through support for mortgage interest, which is available to those who are out of work and to pensioners. It is delivered through social security benefits. We will make the scheme more generous, as he requested, by increasing the size of mortgage for which support is payable for new working-age claimants. At present, it is £100,000. We announced that it was going up to £175,000, then this week announced that it will go up to £200,000. In addition, we will increase net support for beneficiaries of support for mortgage interest through maintaining payments at the current interest rate for the next six months for existing claimants.
The hon. Gentleman asked about new claimants who might be in a difficult position. I will drop him a line to respond specifically to that.
The Government are also determined to ensure that every household struggling with debts can access free and impartial debt advice. My right hon. Friend announced in the pre-Budget report an additional investment of £5.85 million to March 2011 for telephone advice, and £10 million to March 2010 for citizens advice bureaux to expand face-to-face debt advice capacity, and to ensure that advice and support are available for borrowers who may need it. I believe that the hon. Gentleman will welcome that, and it will be particularly important for the group of people about whom my hon. Friend Mr. Devine was concerned.
We recognise that tighter credit conditions are making life significantly harder for a large group of home owners across the country. What we need to be doing is not pushing lenders into operating in a risky or non-commercial way, but rather fostering appropriate long-term conditions for economic stability and growth. In the shorter term, we are targeting support on those home owners who most need help. That is the right approach, and we will continue to do everything we can to support those who get into difficulties.