Mortgages: Eligibility — [Mr Philip Hollobone in the Chair]

Part of the debate – in Westminster Hall at 5:06 pm on 23rd October 2017.

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Photo of James Cartlidge James Cartlidge Conservative, South Suffolk 5:06 pm, 23rd October 2017

It is a pleasure to serve under your chairmanship, Mr Hollobone; I think it is for the first time.

I congratulate my hon. Friend Paul Scully on responding to the petition, which is on a very important subject, and I also congratulate other hon. Members who have spoken.

I need to declare my interests, as recorded in the Register of Members’ Financial Interests. I still have an interest in a company that brokers mortgages; I was a mortgage broker myself, and I hold the mortgage advice qualification, although I certainly do not practise day to day any more.

My immediate reaction to the proposition in the petition is, as others have done, to express my sympathy to those people who have signed it, and my understanding of their huge frustration at being unable to get on the property ladder and achieve their aspiration, which most of us in this Chamber have probably achieved and which previous generations have perhaps taken for granted, namely to own a home—their first home—so they can build a life for themselves. Indeed, we can have huge sympathy with the person who says they have paid £70,000 in rent.

My first point, based on my experience, is that rent payments are taken into account. We must distinguish between the initial decision in principle on application, which is normally automated and credit-scored, and further underwriting on a full application. If I want to have a rough sense of what I can borrow, I might get an agreement in principle from my bank for a certain amount. If I then find a property, have an offer for it accepted and go through the full application, as it is called, in my experience it is very rare, particularly if someone is a first-time buyer, that applicants would not have to provide bank statements. That was happening in 2004, when I started as a broker, and the main thing that underwriters are looking for on a bank statement is the consistent monthly payment of rent.

It is true that underwriters look at other things, and it is possible to tell a lot from a bank statement. I remember that before mortgages were heavily tightened up after the crunch—quite rightly so—underwriters would come back and say, “Can you ask them what these payments are?” and it would be discovered that they were for a debt that was not recorded on their credit reference, for example a debt from a casino. I am afraid that such a case would be declined.

As Martin Whitfield said, we do not have in-branch underwriting, typically; those days are gone. However, I think there is—and there should be—still a lot of manual underwriting on first-time buyer cases. The other point to make is that it has to be said clearly that someone paying their rent on time is not enough, because of other factors that may be in the background. Someone may pay their rent but be behind on paying off their credit card or in paying a utility bill.

The House of Commons Library briefing states that the Financial Services Authority—now the Financial Conduct Authority—conducted a

“detailed study into the predictive ability of applicants with poor credit history and found it to be a significant predictor and hence determinant of lending decisions: ‘Our findings show that the dominant characteristic present in all of the highest-risk lending combinations is whether the borrower has an impaired credit history.’”

If someone pays their rent, does not have bad credit and is on the electoral role—important for the credit score—they will probably get an agreement in principle. They will then go to a full application and their bank statements and so on will be assessed and the person who has the county court judgments and the defaults will, of course, be declined at that point, which is absolutely right.

I have mixed feelings about the exact call of the petition, but I have considerable sympathy with it and think that it presents a really good opportunity. I want to make a few points on the wider issue of mortgage availability. This month I received a copy of IFA Magazine, the main article of which is called, “Never Say Never Again”. That is a reference not to the “Thunderball” remake but to the possible re-emergence of sub-prime lending, which is a very serious issue. I quote Michael Wilson, who wrote the article:

“Quietly, almost surreptitiously, ‘impaired credit’ mortgages are coming back into the game—it’s just that you don’t see them advertised by the big players. Instead, alternative banks and pseudo-banks such as Masthaven or Pepper Homeloans or Magellan or Bluestone or Kensington Mortgages…are offering carefully risk-graded home loans to people who’ve had anything from a missed phone contract payment to a County Court Judgment.”

I remember, back in the days before the crash, the availability of sub-prime mortgages. There was an entire menu of grades of what were called adverse mortgages: light adverse, medium adverse and heavy adverse. Heavy adverse is, basically, “Do you have a pulse?” That was what it was like in those days. Extraordinarily, people who had bad credit, stretched affordability and a low deposit, wanting an interest-only deal, could get a mortgage, often even at a relatively competitive rate. The Government, through the regulator and the prudential authorities, should be extremely cautious about any return to that sort of risky lending to people who have failed to pay significant credit. Of course, there will always be discretion on relatively minor credit misdemeanours and so on.

We must think about greater access for, for example, the self-employed. I was on the Work and Pensions Committee before the election, and we had an investigation into the rise of the gig economy and a new breed of worker—they are called “workers”, with a capital “w”—who are self-employed but work very regular shifts and arguably have all the characteristics of employees but no employment contract. In my view, there have been abuses, because such workers do not get the security an employee would expect. In those cases, there is an argument that lenders should have much more discretion and we should not automatically say, as is usually the case with the self-employed, “Well, if you don’t have three years’ accounts, sorry, you can’t get a mortgage”. The world of work is changing, and lending needs to change with it.

The other issue, which I think will become even more important and on which we will get more correspondence, is lending into retirement. That is not necessarily lending to people who have retired; it is the opposite. If someone applies for their first mortgage at 50, as people do at the moment and will be doing more in the future, to defray the costs somewhat they might want a 30-year term. However, that would take them to 80, which is currently simply not be possible. Lenders would refuse outright to do that in almost any situation—even if someone had a gilt-edged pension agreed. We need to consider whether that is reasonable, given that we are going to be living longer and have a much higher statutory retirement age. Although we should always be as prudent as possible with lending, it is perfectly in order that someone, particularly someone younger, takes a longer term, perhaps even 40 years. For a 25-year-old, a 40-year term up to 65 on a capital repayment basis is perfectly sensible, obviously subject to all the other criteria being met.

Regarding lending in retirement, I went to a fringe event at a conference two years ago and the lenders were already thinking about people who have retired on good incomes. They might be 30 years from death and want access to credit. That will become a growing issue.

The point I most want to make, and about which I feel most strongly, is buy to let. My first speech as an MP, after my maiden speech, was on buy to let, and I said that we should consider things like a stamp duty surcharge and a tax on the interest relief. To my surprise, the previous Chancellor had the courage to introduce those measures—they are not exactly popular with some Conservative voters. We have mentioned the person who paid £70,000 in rent: they are paying a mortgage, just not their mortgage. They are almost certainly paying the landlord’s buy-to-let mortgage.

I have been to many events with buy-to-let landlords and defended these issues. I have nothing against those who invest in property. On the contrary, with the pensions system as it has been, it is understandable that people should invest, as their pension, in what they see as the safest asset, particularly when it has reliable rent income. However, it remains scandalous that a first-time buyer can only get a capital repayment mortgage, which is absolutely right—if someone takes out a debt they repay that debt, it is as simple as that—but it is still possible, almost as the default, to take out an interest-only mortgage for a buy to let. The criteria have tightened, but that issue is so significant because to calculate whether someone can obtain a buy-to-let mortgage, the key issue is coverage, which is that the rent covers the mortgage by, for example, 125%. That criterion will be met far more easily with an interest-only mortgage than a capital repayment one.

In my view, the bubble we built up in the property market would not have happened to the same degree if we had insisted on capital repayment, because far fewer landlords would have passed the test, prices would not have risen so steeply and some of the measures we have had to pass to calm the buy-to-let market might not even have been necessary. It beggars belief that we expect first-time buyers to repay the capital—as they should—but not landlords, who may own many properties.

We must remember that there is a moral issue here. When the banks crashed on the back of their own irresponsibility, the bail-out was funded by a national debt that is held by everyone. The property values of all those who own property, ultimately, were bailed out. The bail-out kept the bubble growing, in fact. If it had not been for the bail-out, we would have had an extremely deep recession, so it was the right thing to do, but we must recognise that it maintained the values of large portfolios—of all those who own property—but it is a cost borne by everyone, whether they rent or pay a mortgage. We therefore have a moral duty to try to find the best ways to encourage access to the property market and to overcome those problems, but we must not do that by returning to bad ways and ditching prudence.