Mortgages: Eligibility

Jim Fitzpatrick Excerpts

Monday 23rd October 2017 Westminster Hall

[Jim Fitzpatrick (Poplar and Limehouse) (Lab)]

I am pleased to see you in the Chair, Mr Hollobone; it is a pleasure to serve under you, as ever. I congratulate the hon. Member for Sutton and Cheam (Paul Scully) on securing this debate on behalf of the Petitions Committee. Those I have spoken to in the housing sector welcome his support, and the petitioners’ suggestion of including rental history in the criteria for securing a mortgage is clear common sense. They will be pleased to hear the Front-Bench speakers, especially my hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds) and the Economic Secretary to the Treasury, express their views and hopefully their support for the petition.

The hon. Member for Sutton and Cheam commented anecdotally that one of the worst-feared phrases is:

“I’m from the Government, and I’m here to help.”

When I was in the Government Whips Office from 2001 to 2004, it was even more welcome when I said to colleagues, “I’m from the Whips Office, and I’m here to help.” However, that is a different issue entirely.

I will speak briefly about a less obvious anomaly involved in mortgage eligibility and problems: the policy of doubling ground rents that many developers impose on leaseholders. Many thousands of people then have difficulty selling their property, because mortgage lenders draw red lines around it, locking it in so that they cannot move along the housing ladder.

There have been a number of announcements recently from the Department for Communities and Local Government. I recognise that that is not the Economic Secretary’s Department, but I am sure that DCLG checks with him before making any announcements, because if the Treasury does not green-light something, it does not get past the starting block. I am keen to hear his comments, as I will explain later, on DCLG’s announcements. They have included the housing White Paper, the leasehold review and the eight-week consultation, the call for evidence last week and statements on Grenfell. Over the weekend, the Secretary of State for Communities and Local Government also announced policies on house building, particularly in the social housing and rented housing sectors.

Ground rents used to be of a peppercorn nature—a token element of house buying. Before the 2008 crash, ground rents rose roughly with the RPI, if at all. After the crash, developers introduced the policy for ground rents to double every 10 years, which effectively meant an 8% to 10% annual increase on ground rents and real problems for sellers and buyers.

Some developers—the good ones—did not go down that road. In the past year, Taylor Wimpey has announced that it will end the doubling of ground rents and return to RPI. It has set up a £130 million fund to put right the unfairness that was introduced into the system and fix the problem. It has a way to go, but at least it has identified and accepted that the policy is anomalous and is looking to repair the unfairness. Some developers, such as Countryside, were still selling flats on that basis in London as recently as this spring.

Consequently, mortgage lenders are drawing red lines against such properties because they are not a good risk. They refuse to issue mortgages against them, which strands leaseholders. Leaseholders cannot move up the housing ladder even if they are getting older and have greater income or if their family is growing and they want to move to a bigger property. The Leasehold Knowledge Partnership, which advises the all-party group on leasehold and commonhold reform, estimates that more than 100,000 properties are in that category and thought to be unsellable; Nationwide, one of the biggest lenders in the country, is on record as agreeing to that estimate. One of my parliamentary team has such a property, a flat in south London. In the last 25 years of his lease, the ground rent on his flat will be £180,000 a year. That is a long way in the future, admittedly, but it is an indication of the eye-watering figures that make lenders really scared to disclose the eventual costs to prospective buyers.

It is clear that the Government recognise that there are real problems at this end of the housing sector. Their consultation on leasehold reform was specifically about ground rents doubling and homes for sale on a leasehold basis. They have said that they will move against both, but they will take evidence in the meantime. A number of welcome initiatives have been announced to address many of the anomalies, including yesterday’s announcement by the Secretary of State on homes in the social rented sector.

The hon. Member for Worthing West (Sir Peter Bottomley), my co-chair on the APPG, has continually raised many of the outstanding problems of leasehold for a number of years. It is encouraging that the Government are moving on a number of those. Leasehold reform is long overdue. The Conservative Government tried to fix leasehold in 1993, and the Labour Government tried to fix it with the Commonhold and Leasehold Reform Act 2002. Neither was successful. It is more than time for movement now. Although the Minister is not directly involved in DCLG’s programme, I would welcome an indication of whether mortgage eligibility is on the Treasury’s radar and whether the Treasury, either separately or in partnership with DCLG, plans to deal with the problem and support DCLG’s proposed solutions.

The ambition of all parties is to support home ownership, but because of these anomalies, that is further away for many people than ever. I look forward to hearing Front-Benchers’ responses to points raised in the debate. From my point of view, leasehold reform is part of mortgage eligibility.

--- Later in debate ---

[The Economic Secretary to the Treasury (Stephen Barclay)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank all those who signed the petition—more than 140,000 people did so—and Members from across the House for this good-natured and constructive debate. The petition shows the importance of debating these issues, which clearly resonate with many people. It is right that the House should consider them.

I thank my hon. Friend the Member for Sutton and Cheam (Paul Scully) for his very helpful suggestion of a market-based solution for fintech, and I am happy to discuss that with him further. I also had a very constructive meeting with Lord Bird, who has done a lot of important work in this area, and came forward with important suggestions. The hon. Member for Plymouth, Sutton and Devonport (Luke Pollard) also demonstrated a degree of cross-party consensus in terms of how we move forward on these issues.

To address directly the issue that the petition refers to—the extent to which paying rent should be evidence of affordability of a mortgage—it is important to note that affordability assessments are not just based on one factor. That is why mortgage affordability assessments include a requirement to assess possible changes to income. It is responsible for lenders to have a long-term perspective when making assessments.

Lenders can currently include payments of rent as a factor, but it is right to highlight that the Financial Conduct Authority independently makes those affordability assessments, or sets the terms relating to affordability for firms. My hon. Friend the Member for South Suffolk (James Cartlidge) drew on his professional experience and expertly explained that a wider suite of issues affects affordability—it is not just one’s past ability to pay rent.

Let me address the issues that hon. Members raised during the debate. My hon. Friend the Member for Sutton and Cheam called for reform of stamp duty. He will be aware that we are very close to a Budget, so I will take that as a Budget submission; I am sure that was the spirit in which he offered it to the House. It is obviously important that we balance people’s right to buy a second home or to buy to let against the impact that that has on other people’s ability to get on to the property ladder. I think that was the point that he was making. He also mentioned supporting the Rental Exchange scheme, which has already lifted 4.2 million social housing tenants into better credit. I encourage housing associations to play a more active role in raising awareness of important schemes such as that.

The hon. Member for Poplar and Limehouse (Jim Fitzpatrick) raised, with great authority, the issue of ground rents. The Department for Communities and Local Government has published a consultation, as I am sure he knows, on that important subject. I assure him that the Treasury will take an active interest in the course of those discussions, but he can probably get a flavour of the Government’s position from the comments of the Secretary of State for Communities and Local Government, who said that too many homebuyers are being exploited. That goes to the heart of the hon. Gentleman’s concerns.

[Jim Fitzpatrick]

As a result of the Government’s Help to Buy scheme, a lot of Government money—taxpayer’s money—has gone into the pockets of developers, who are taking advantage of the good Government policies that encourage first-time buyers. They are taking that as clear profit. I know that the Government are very interested in that, so I look forward to seeing what they do in the Budget.

[Stephen Barclay]

I am happy to alert the Housing Minister to the hon. Gentleman’s concerns, but more than half the homes triggered by the policy are new, so Help to Buy has helped with the supply issue. I will raise that point with the relevant policy Minister.

My right hon. Friend the Member for Clwyd West (Mr Jones) asked why the Government are not solving the problem of including rental payments within credit scores through the standing order system. I encourage any stakeholders with views about how best to encourage rental payments within credit scores to write to me about that. Perhaps my right hon. Friend and I can have a further discussion about that point.

My hon. Friend the Member for South Suffolk said that credit scores are a good predictor of credit risk, and I agree. That is why capturing a history of payment on time in people’s credit scores will help lenders make better decisions. My hon. Friend’s point is very pertinent. He also mentioned the ability of self-employed people to get a mortgage. Mortgage regulation means that the self-certifying mortgages seen before the financial crisis are no longer available, and I think he and I would agree that that is a good thing. However, some lenders will accept relatively short payment histories—12 to 18-month periods—as evidence of income, which suggests constructive engagement on that point.

My hon. Friend also mentioned lending into retirement. There is no reason why older customers could not obtain a mortgage if they could demonstrate their ability to repay. The FCA continues to consider how the financial services sector can better work with older people through its ageing population strategy, which was published in September.

The hon. Member for Aberdeen North (Kirsty Blackman) raised the issue of the cost of living: people paying rent cannot save for a mortgage. The Government have clearly taken some measures in this space, such as the crackdown on payday loans, which was widely welcomed across the House. The FCA is reviewing the high cost of credit and the car finance markets, as well as issues such as persistent debt in the credit card market. There will be further updates in 2018.

The hon. Member for Bath (Wera Hobhouse) made an intervention about not encouraging debt. That emphasises the importance of the affordability assessments for mortgages being based on a holistic view of an individual’s finances, which in a way goes to the heart of the point that drove the petition—one cannot look at rental payments; one needs to take a holistic view in order to address the point that she pertinently intervened on.

The shadow Economic Secretary, the hon. Member for Stalybridge and Hyde (Jonathan Reynolds), raised the issue of housing supply. We very much recognise the imperative of housing supply. That is why the Government launched our housing White Paper in February, which proposed an ambitious package of long-term reform: releasing more land for homes where people want to live; building the homes we need faster; getting more people building, and supporting those who need help to buy. A suite of measures in the White Paper already speaks to many of the issues to which he referred.

Those leasing their home face the challenge of saving for a deposit while paying rent. That was the tenor of much of what was raised by colleagues across the House, and the Government very much recognise that through policies with which Members will be familiar: the Help to Buy scheme, which has helped with in excess of 320,000 housing transactions, more than 270,000 of which were for first-time buyers; and the help to buy ISA and the lifetime ISA, which both top up savings for a deposit to buy a first home.

Helping individuals to save for a deposit, however, will not address the problem on its own. That is why the Government intervened through the Help to Buy mortgage guarantee scheme, to ensure that the mortgage market works for people who rely on high loan-to-value mortgages. The Government also committed an extra £10 billion to the Help to Buy equity loan scheme.

Fundamentally, however, we also recognise the need to build more homes. Since 2010 significant progress has been made, with almost 900,000 homes built, including 300,000 affordable ones. The White Paper sought to address that and to accelerate the pace at which homes, including affordable homes, are built.

Turning to the specifics of the petition, the Government agree that a history of paying rent on time is a factor that lenders can consider when assessing creditworthiness, but it is a factor alongside others—not the sole factor to take on board. It is important to stress that mortgage regulations do not prevent lenders from taking into account rent payment as one of the criteria on which to assess affordability.

I therefore want to outline some of the opportunities that exist for connecting housing associations and others with lenders—my hon. Friend the Member for Sutton and Cheam focused on that in his remarks—and how we encourage them all to work to build the profile of those who are renting and seeking to build their mortgage history. The diverse nature of the mortgage market means that prospective borrowers should shop around to take advantage of the variety of options that are available. It is also important to highlight the reforms that took place to prevent the poor lending practices seen before the crisis. Again pertinently, my hon. Friend the Member for South Suffolk highlighted that in his remarks—it is important for us to take on board the lessons of the financial crash of some time ago.

Today, to address such concerns, the banks are required to conduct a comprehensive examination of an individual’s expenditure and income, and an interest rate stress test of that individual’s ability to make repayments. I hope that is one of the measures that will satisfy the concerns expressed by my hon. Friend. Overall, the changes are designed to ensure that the problems of the past are not repeated, but that means that the bar for getting a mortgage can be higher.

My right hon. Friend the Member for Clwyd West mentioned opportunities for making better use of rental data in creditworthiness assessments. Options are available that allow renters to ensure that their rental history is captured in the information that credit reference agencies provide to lenders. That has the potential to improve the chances of someone getting a mortgage. He correctly cited the example of Experian and the potential for housing associations and credit reference agencies to work together to build more examples than the existing Experian one.

Part of the problem is that awareness of such schemes is low. The Government would like take-up to be increased and more ways to develop such models. I am happy to discuss the issue with my right hon. Friend. It is important to do things in a way that works with and builds on existing systems and processes, to avoid increasing costs for business and making it more expensive or difficult for people to access mortgages.

In the social housing sector, I want landlords to play a more active role in increasing awareness and take-up of the existing options. In the private rented sector, as well as the social housing sector, technology and innovation should be pivotal. The open banking changes, which will come into force in January 2018, will help to open up access to our data in a secure way, leading to all manner of innovations that will make it easier to build the creditworthiness models that have been discussed.

To conclude, although it is encouraging to see the number of mortgages granted to first-time buyers, now at the highest levels since the financial crisis, it is clear that many people still struggle to make the first step on to the housing ladder. Lenders and credit reference agencies being able to access data relating to a prospective borrower’s history of paying rent will benefit both the borrower and the lender. There are already private sector solutions, some of which we have heard about in the debate. I am keen to look for ways to raise awareness of those, and to look at how we use open banking to open up further possibilities in future. We have had a very constructive debate and I look forward to having further discussions with Members in the coming weeks.