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Mr. Dewar: I agree with the hon. Lady and that no doubt is the hope. However, the hon. Lady will recall that things can go up as well as down. Between 1991 and 1993, premiums in the sector about which we are concerned increased by 43 per cent. and a large number of insurance companies made very substantial losses and withdrew from such business. If the proposal is to be the substantial foundation on which the Government are relying, it seems to be a very high risk strategy.
As I do not have time to deal with those groups in detail, I shall simply say that there will be great difficulties for the self-employed. I am told that most private insurance companies will cover the self-employed. However, they will pay only if they are satisfied that the self-employed have ceased to trade. The terms are usually that a business must be wound up or, in some cases, that the self-employed are in voluntary liquidation or are bankrupt. That does not seem to be a happy situation.
The disabled can be covered too, but not, of course, for any claim that arises out of their disability or an existing illness. Even for those who will be covered, there will be
Column 497bad news and good news. The good news, according to the Association of British Insurers, is that one's premium is likely to be calculated to reflect the increased risk. In other words, they will be paying above the average. The bad news is that that degree of sophistication is probably still a year or two away, so that in the interim there will probably be no cover for them at all.
There are also single parents, who comprise about 20 per cent. of the claimants' group. They, I am told, will be all right. The Association of British Insurers says to me that we do not need to worry; most of them will not qualify for a mortgage, so they will not need mortgage interest support. Even those who have mortgages and whose marriages break up will get the support that they require from their former partners--ha, ha--or from the work of the Child Support Agency, we are told. [ Laughter. ] Definitely, there is cause for some laughter at that point.
For new single parents, the results of an immediate and unexpected divorce, there is unlikely to be any cover at all. They do not fall within the remit of the industry. If they did obtain cover or if they had cover, they would almost certainly not receive payment for 12 months, according to the Association of British Insurers, because it would not pay out because of the danger of fraud until decree nisi had passed. By that time they would have had the equivalent, anyway, of the nine-month period without any help and would be in grave danger.
It will not be easy to obtain comprehensive cover of the kind that the Secretary of State has suggested. I certainly recognise, as he does--it is a point that I have made about single parents--that most private contracts allow for 60 or 90 days without any payment or support in any event, so we are left with private insurance cover not covering the gap that the Secretary of State is creating, although insurance cover was supposed to be the answer to that gap. That must be very unsatisfactory.
A large number of people will not take out cover and may find themselves unexpectedly at risk. Fewer than 5 per cent. of existing mortgage holders have such insurance cover. It has gone up substantially recently, but again, to quote the Association of British Insurers, even if the advantages of this kind of insurance are pointed out--we know what that means--by the lender, then the "penetration rate"--a somewhat sinister phrase--
"can be as high as 35 per cent."
That does not sound like comprehensive cover by any reasonable definition.
Repossessions are dropping. That gives me great pleasure, and I hope that they continue to drop, but the Council of Mortgage Lenders, the Building Societies Association and the people who are in the business of lending will say that they are convinced that one result of the changes, if they are brought into force, is that there will be more repossessions than there should have been and that even if, as I hope, there is a continuing drop, it will be very much smaller than it otherwise could have been. The Secretary of State should take that point into account.
I ask the Secretary of State to deal with the 1991 agreement between the Department of Social Security and the Council of Mortgage Lenders. In it, direct payment was agreed and, in return for direct payment, it was said there would be no repossessions. It is very important that that holds good and continues.
Column 498I draw the right hon. Gentleman's attention to the CML news update, issue No. 4, which has just come out and with which I am sure he will be familiar. Its second and most important conclusion is:
"it is difficult to see how the December 1991 agreement between lenders and the Government can now survive."
If that is true and if that fear turns out to be justified, that would be an extremely serious matter. One of the difficulties that worries the trade and me, although there have been some reassuring words, is how the new standard rate will affect people who have been prudent and have taken out a fixed-interest mortgage and who may find that there is a continuing gap on a permanent basis, when they are in receipt of support, between what has been paid on their behalf and their obligation and indebtedness to the lender.
I shall be very quick because I recognise the strictures of time in this short debate, but let me turn to the justifications, as I understand them, for the changes. One is that it is appropriate, proper and meet that those who own their own homes should stand on their own two feet. That is an attractive idea, and I understand that it may appeal to some members of the Conservative party, but I cannot understand the logic behind it.
If we assume--I believe that we are right to do so--that people on income support in rented property deserve to have their rent paid because of their financial difficulties and the situation in which they find themselves, why should people in exactly the same financial situation, who qualify for and receive income support, get no help whatever simply because they have bought their own homes? There seems to be something of a turnabout in historic terms, because I am now defending home owners. I do not see why they should be discriminated against, and that is exactly what is happening. There will be help with rent for people on income support but no help with mortgage interest payments. Of course there should be no repayment of capital, because that would be preserving and enhancing a capital asset, but what is the logic behind the discrimination against home owners?
Mr. Julian Brazier (Canterbury): Surely there is a considerable difference in circumstances between the two cases. People who buy their own houses not only take on a considerable responsibility, and should understand that that is what they are doing, but in the vast majority of cases, despite the fact that there is some negative equity now, will enjoy a capital gain in the long term.
There was once a time when a home owner would live in the stockbroker belt in a Tudor villa, but now many of my home owners live in former council houses; many have had to struggle, and are marginal home owners in every sense. I have not time to embroider the argument, but I feel strongly that the proposal is discriminatory and cannot be justified.
Column 499people on the Treasury Bench are supposed to be so fully committed to owner-occupation, this should be the last thing that they would suggest. They could justify it to their supporters only if they answered my hon. Friend's question by describing it as a first move towards further reform. The next move could be to expect people to cover their rent through some form of insurance in case they become unemployed.
Mr. Jenkin rose --
Mr. Jenkin: In view of the hon. Gentleman's unhappiness about the apparent inconsistency between the treatment of rents and that of mortgage interest, is he undertaking that it would be a Labour Government's policy to harmonise those arrangements? Does he undertake not only to reverse the present situation but to go further? How much would that cost?
Mr. Dewar: At the moment I am arguing that discriminatory treatment should not be introduced and that we should oppose it. I genuinely hope--I am not being sarcastic--that as the hon. Gentleman has some experience in the subject, he will join me.
As I understand it, the second reason for introducing the measure is the idea that the insurance market can offer more comprehensive cover. For example, if people have savings of more than £8,000 they do not get income support, and if someone loses his job and the family income is cut by two thirds but his wife still works, the family may not qualify for income support. The idea is that for the £200 or £300 a year spent on the premium people will have a security and stability that would not otherwise be available.
I have been trying to tell the Secretary of State that I do not believe that such comprehensive cover will be achieved. Many of the vulnerable people will not buy cover and will end up in the vale of tears; there may be a considerable on-cost to public funds in the end. It may be right to be prudent, but prudence is not compulsory; it is an addition and an alternative to the safety net of the mortgage interest protection organised by the DSS.
There is another argument of great importance, on which I make no apology for quoting the Council of Mortgage Lenders again. The council first says that there has been a drive to encourage home ownership for people on more modest incomes--I approve of that. It adds:
"First, the Government remains committed to assisting people to enter owner -occupation--the Housing Corporation is being instructed to give an increasing proportion of its budget to low-cost home-ownership initiatives which supposedly enable marginal groups to enter owner-occupation."
The council then argues trenchantly and forcefully that the Government's proposals run counter to that aim, because they will have two effects. First, they will put at risk many people in that economic situation--the low-bottom tranche of home ownership, which many
Column 500people have been artificially stimulated into entering. Secondly, according to the council, the proposals may frighten out many people in the commercial world who might otherwise have invested in such enterprises.
The council argues that the proposals are therefore incompatible with the general thrust of Government policy--a thrust with which, unusually, I sympathise. I do not believe that home ownership should be the privilege of the well-off. The policy causes an unpleasant clash of principles within the Government's scheme of priorities, and I ask the Minister to think again.
I shall finish--or almost finish--by giving the final reason for the proposals: the Government hope to save money. I shall ask the Minister to say a word or two about that. The DSS press release mentions £200 million in the long term--an interesting figure. We know that the minor adjustment in the cap on mortgages--the limitation to £1,000--will save only £1 million between October, when it is introduced, and the following April. From that April to the following October the savings will again be only £1 million. That may surprise hon. Members, because that measure sounds quite important. As the hon. Member for Lancaster (Dame E. Kellett-Bowman) said--I do not want to draw attention to her in case she rises in her wrath--we are spending £1 billion. Yet the saving is only £1 million.
Let us take a more important figure--the estimated saving from new mortgage holders after 1 October. Those are the people who will find that they lose nine months' support. What will that save? I received a parliamentary answer to that question, and I can hardly believe it. Assuming that one includes all the people involved, the annual saving will be £18 million. What is £18 million compared with the cost of the scheme?
The adjustment will mean bureaucracy, discrimination, differentials and many other problems. It will put some people at risk, because some will lose their homes and possibly their jobs; there will certainly be casualties. Yet the figure for savings resulting from the main change is something like £18 million for a whole year. That is dogma run mad, and it will cause an enormous number of difficulties. I hope that the Minister will say clearly what savings he expects will result from his proposal.
Now I really shall finish, by saying that the Secretary of State is in a double bind. If the system is as comprehensive as he says, if he gets everyone on board and persuades them all to find the extra £200 or £300 a year, he will create a considerable additional burden for home owners right across the range. Many may escape the burden and will not have to pay, but then the trouble will be that the system will not be comprehensive, thus losing the only virtue that the right hon. Gentleman parades.
Better-off people in steady employment, who may well pay the insurance, may ultimately begin to think that they are paying for something that they do not need, and that they have been done. The vulnerable, the people who really need the coverage, will no doubt recognise that they cannot afford to take it out, and they will join the casualties.
In the consultation, I hope that the Minister will consider what is being said by the Consumers Association, the National Association of Citizens Advice Bureaux, the Association of British Insurers, the Building Societies Association and the Council of Mortgage
Column 501Lenders, all of which have trenchant criticisms of the right hon. Gentleman's proposal. Some of those organisations are openly, root-and-branch hostile to the idea.
Some Conservative Members have already raised a cry of pain. I am confident that Tory Back Benchers who go to their constituencies will not be met with a quiet word of congratulation in the corner and a mutter of welcome for the new proposals. They will find--rightly and understandably--that the proposals are very unpopular.
I do not mind about that--it is not my problem. I do mind about a number of people whom I know personally, and many more whom I know exist in my constituency, who are existing on a budget that is stretched to breaking point by a mortgage. Those people have no room for error or for manoeuvre, and they may well be put to the wall because of the increases in costs. They may decide to run the risk, and end up as really difficult casualties, and find that they have no support at all for a vital nine-month period. I do not think that those people should be put at hazard by the measure. I do not think that people such as them--who exist in every constituency--should be forgotten in the House, and that is I why commend the motion. 4.50 pm
"condemns the Opposition's wish to continue the inadequate existing system of Income Support Mortgage Interest, which does not protect those with modest savings, those with small pensions or redundancy payments, or those with a working spouse, which has undermined the spread of private mortgage insurance and has contributed to 50,000 homes a year being repossessed; believes that the Government's proposals will lead to the development of more comprehensive, less costly insurance cover; welcomes the fact that pensioners on income support will continue to have their mortgage interest paid; and reaffirms its commitment to home ownership". Much as I like the hon. Member for Glasgow, Garscadden (Mr. Dewar)--he knows that--we will take no lectures from him or from any of his colleagues, who voted at every opportunity to stop council tenants having the right to buy their own homes. They cannot pose as the friends of home ownership.
We will take no lectures from a party that has always used every lever available to it in Parliament, local councils and housing authorities to prevent people from owning their own homes. The Labour party has only one objective locally and nationally: to become the nation's landlord. We are the party of home ownership, and we will remain so.
The Labour party is trying to pretend to be on the side of home owners, but its position wholly ignores the problems of those who suffer the risk of repossession. Labour offers nothing, and in his speech the hon. Member for Garscadden offered nothing to help them. Labour seems to oppose the spread of private insurance, which would protect such people because, on doctrinaire grounds, it is against private insurance. We believe that the present income support arrangements for mortgage interest, which are extremely costly to the taxpayer, are manifestly unsatisfactory and need reform. They fail to provide comprehensive cover.
Column 502The Labour party mentions the present system of ISMI as though it provides cover for everyone who finds themselves unemployed or without earnings: it does not. Two thirds of home owners would not qualify for help if they lost their jobs today, either because they have a working spouse or because they have a little saved. Many of the remaining one third would be disqualified simply because they were receiving redundancy pay or an early retirement package. Labour offers nothing to protect them from the risk of repossession. As a result, some 150,000 people a year who lose their jobs receive no help from income support with their mortgage interest. Labour offers nothing to help them to avoid the risk of repossession. Some 50,000 people have their homes repossessed every year, many of whom are not in receipt of income support. Labour offers nothing to help them.
We are determined to improve the situation, and that means encouraging the growth of private insurance. Private insurance has been growing, but the very existence of income support for mortgage interest has undermined its growth over a period when it could have provided valuable cover.
People who believed that they were covered did not take out insurance, only to find that they could not receive help from the state. Our measures will help to reduce repossessions in a number of ways.
Ms Ann Coffey (Stockport): Will the Secretary of State comment on a problem that one of my constituents experienced? He took out mortgage protection insurance cover but, because he attended a Government training course the Employment Agency did not deem him to be unemployed, for reasons of which I am sure the Secretary of State is well aware. As the agency would not confirm that he was not in employment, his insurance company refused to pay out.
Is the Secretary of State aware that there will be thousands of such cases? People will have to read the fine print of their insurance policies carefully. Is he further aware that there will be endless wrangles between constituents, Members of Parliament, insurance companies and the Employment Agency over exactly what unemployment means?
Mr. Lilley: The hon. Lady makes an important point. One of the consequences of our reforms will be that lenders and borrowers will have an interest in ensuring that insurance policies are good, high-quality policies that cover what they purport to cover and offer protection against the circumstances in which people may find themselves. Those include the circumstances described by the hon. Lady. I shall return to that issue; it is an important aspect of what we are seeking to achieve.
Mr. Jenkin: Should not home owners be advised to read carefully the small print of the next Labour manifesto? Is not it unclear what policies are being promised to make home owners more secure under a Labour Government?
Our measures will help reduce repossessions in a number of ways. First--I do not recall the hon. Member for Garscadden mentioning this--for existing borrowers,
Column 503we shall start paying ISMI direct to the lender from the outset. At present, during the initial 16-week period, when it is payable at a rate of 50 per cent., it is paid to the borrower, but it is often not passed on to the lender. Arrears can then accumulate, and that can cause problems. That will not happen in future.
Secondly, we will ensure that all those taking out new mortgages are encouraged to take out insurance or other forms of cover for the first nine months of any loss of earnings. It will be in the interests of the lender and the borrower to see that proper cover is in place. ISMI will be available after nine months--much as at present--to cover those who face loss of earnings.
Mr. Richard Burden (Birmingham, Northfield): Will the Secretary of State explain how the measure will help many borrowers who will lose income support for the first nine months? Those borrowers will be urged to take out private insurance, but most private insurance companies will not pay anything for the first 90 days, or at least the first 60 days. Where will the borrower obtain the money that the Government have removed?
Mr. Lilley: Responsibility for providing protection in the event of loss of earnings must be covered by the borrower, the lender and the Government. We all have a responsibility, but it is perfectly reasonable that during the first couple of months the lender and the borrower should meet the cost of any inability to pay interest. We should remember that the vast majority of people who lose their jobs get back into work shortly--two thirds do so within six months and a large number within the first couple of months. That makes it unnecessary to make arrangements for paying interest to lenders, who are large institutions with extremely large resources. Lenders can deal with that in the first instance, as of course they do for the majority of people who are not covered by income support for mortgage interest.
Mr. Frank Field: The Secretary of State assures the House that all will be well when the measure is passed, but the Opposition naturally question whether that optimism is securely based. We are worried on a number of counts. Following his experience with the Child Support Agency, the Secretary of State has been converted to pilot studies. Has he thought about introducing them for this measure, so that before we make the scheme universal we can find out which side of the House is right--the Conservative side, which is confident that all will be well, or our side, which is worried that many people will suffer as a result?
Mr. Lilley: I do not think that this measure will suffer from the organisational problems that beset large-scale organisational reform. In a sense, we already have experience of private insurance and we want to build on it and to make it better. We know from our experience of the state system that it is inadequate and that it leaves many people uncovered--an issue that the Opposition have failed to mention. We are making the change only for the first nine months and for those taking out new mortgages, so it will be introduced gradually, as new people enter the market.
Column 504Pensioners on income support will continue to receive payments for their interest--
We have begun consultations with those involved, will consult carefully about how the change may affect other groups and are determined to get the details right. I will deal with extensive coverage in a moment, but first I must deal with some of the criticisms that have been made here and in other Labour party statements in recent weeks.
The alleged increase in the cost of buying houses, as a result of the combined effect of the recent small interest rate rise, changes in mortgage interest relief and the introduction of private insurance, is one of the main complaints, which were widely faxed to the newspapers by the hon. Member for Dunfermline, East (Mr. Brown), to which the hon. Member for Garscadden alluded. They claim that that increase will price first-time buyers out of the market, which is sheer nonsense.
The two main determinants of the cost of buying a house are the price of houses, which by historical standards is low relative to earnings, and the interest rate, which is almost at a 20-year low point because of our success in getting inflation down, which will be put at risk by Labour's policies. Their combined effect means that, even after allowing for the tax change and the potential cost of mortgage insurance, the cost of house purchase is little more than half the proportion of net income that it was at its peak about five years ago. As my right hon. Friend the Prime Minister pointed out at Question Time, the typical mortgage today costs £140 a month less than in October 1990.
Claims that the cost of mortgage protection is high and is likely to rise are nonsense. One can already insure one's mortgage for 4p in the pound on one's monthly advance, if one insures direct, which is only £12 per month on the average mortgage. How many hon. Members spend as little as that to insure the contents of their house, and how many think it strange that they, rather than the taxpayer, have to pay the buildings insurance on their home, which is usually a condition of a mortgage?
Mr. Dewar: The cost of alternative protection is obviously important. Perhaps I have placed too much reliance on the Building Societies Association and the Council of Mortgage Lenders. Is the right hon. Gentleman saying that he believes that someone on an average mortgage could arrange adequate cover for under £150 a year?
Mr. Lilley: Yes, if they took advantage, for example, of the new General Accident Direct insurance, rather than going through a building society and paying it the additional commission. Commissions may well decrease as a result of our changes and I very much hope so.
Mr. John Denham (Southampton, Itchen) rose --
We consider it normal to insure, and to be required to insure, the fabric of the building against fire and damage when we take out a mortgage. We do not think it unusual
Column 505to take out life insurance policies to pay off the mortgage if the breadwinner dies. Moreover, competition is reducing the cost of home building insurance. The Halifax has announced cuts of up to 60 per cent. in its insurance premiums, with average cuts of about 20 per cent. The Association of British Insurers is convinced that the cost of mortgage insurance will come down as it becomes more universal. At present, the worst risks--people who suspect that they may be made redundant--are those who are most likely to take out insurance, which means that costs are higher than they would be otherwise. The spread of insurance over a wider spectrum of people will give a better spread of risks, and so reduce costs and premium.
Some hon. Members have claimed that the changes will adversely affect the housing market. I certainly recognise the importance of rebuilding confidence in the market, but I do not believe that our announced changes will undermine it. On the contrary, it is clear that it is not the cost of purchasing houses that is holding back the housing market, as it is historically quite low relative to incomes and will not be appreciably affected by the modest cost of mortgage insurance.
The main problem is personal confidence and fear of unemployment at a turbulent time in the labour market, not merely here but worldwide, which is causing new buyers to hold back. When insurance cover is the norm, as part of a new mortgage, potential new buyers are likely to feel more confident, not less. Moreover, fewer people who become unemployed will be unable to cope and thus face repossession, so the market will be less depressed by forced sales.
Almost by definition, a market in which new buyers are properly covered against risk will be healthier, more active and more resilient.
Mrs. Maria Fyfe (Glasgow, Maryhill): In my constituency nine people are chasing every job. Does the right hon. Gentleman believe that premiums will be higher in such an area, and what is his estimate of what they might be?
The main threat to the housing market is people such as the hon. Member for Garscadden and others talking it down, scaremongering and spreading wholly unfounded fears, and they should be ashamed of themselves. The Council of Mortgage Lenders told me emphatically that people should not talk down the market, as the Opposition have. Some Labour Members have asserted that cover will not be available for certain groups. The insurance industry has roundly rebutted that assertion. In its paper, the Association of British Insurers states:
"Very few people, having first been accepted by a mortgage lender as a satisfactory credit risk for granting a mortgage will not be eligible for insurance. Even in these few cases, the competitive nature of the mortgage protection insurance market is such that new products are likely to be developed quite quickly, or existing products refined to provide cover".
Column 506Likewise, the Abbey National said:
"If we have agreed a mortgage there is no reason why the borrower should not then qualify for mortgage repayment protection." Of course, we shall take care when framing the regulations to ensure that we encourage comprehensive cover for all those who should be able to get a mortgage. I am pleased that the Council of Mortgage Lenders and the Association of British Insurers have agreed to work closely with my officials to ensure that we do all that we can to achieve that objective.
Mr. Denham: The Minister referred to the Council of Mortgage Lenders and said that it did not want people to talk down the housing market. Is that the same Council of Mortgage Lenders that has written to hon. Members, saying that it is
"concerned about the potential impact on mortgage borrowers and on the housing market of the changes which have been announced"?
Mr. Lilley: Yes, it is, and a certain ability to argue its case when it has a vested interest in receiving more than £1 billion of public money with no questions asked is not surprising. Whoever suggested that the hon. Gentleman should be cautious about repeating everything that the Council of Mortgage Lenders says was right. It would be a first, in my experience, if an interest group in receipt of public money did not argue to continue receiving at least as much of it in future.
Mr. Brazier: I am most grateful for the fact that my right hon. Friend continues to set an excellent example by giving way to hon. Members on both sides. On the moral point about vested interests, does he agree that it is wrong that people who take out mortgages on large properties should be underwritten by the state--and the taxpayer--in some unlimited fashion? After all, the taxes are paid by people who are often on much lower incomes.
Mr. Lilley: That is certainly correct. I am sure that hon. Members on both sides will have been shocked by a number of recent, highly publicised cases of significant sums being lent to certain people. For instance, a part-time speech therapist was able to secure a loan of hundreds of thousands of pounds on the prospect that she would cease to be part time and be able to work full time--only to discover that she could not do so. The lender who made that decision felt it right and proper that the taxpayer should underwrite the risk. That is surely not an optimum use of taxpayers' money.
Insurers and lenders make it clear that policies are available for many of the groups for whom it is alleged they are not. As the hon. Member for Garscadden admitted, they are available for self-employed people. Policies have long been available to cover sickness and disability. Contract workers and people working in non-traditional ways are a growing phenomenon, and lenders are recognising that they will have to adapt to it if they want to be able to supply home finance for such people; otherwise they will lose out in an important market. They are therefore developing schemes involving repayment holidays between contracts built into the mortgage provision for people who are contract workers. We welcome that. In our discussions we shall attempt to find out what can be done to facilitate the growth of such policies.
Column 507The hon. Member for Garscadden mentioned the consequences of marital breakdown. Of course, insurance policies do not cover that, but we should at least question whether those who split up can use that as an excuse immediately to pass on the cost of their mortgage to the taxpayer. Why should married taxpayers have to subsidise divorce? Is that Labour's policy? If a husband scarpers and leaves a wife to bring up the children with no income, in the first instance it is for the building society to pursue the errant husband, to make sure that he meets that liability. Moreover, in such circumstances, the building society has a duty to be helpful to the mother with children; should the situation persist beyond nine months, income support for mortgage interest will be available to help.
I accept that, as the hon. Member for Stockport (Ms Coffey) said earlier, policies have not always been satisfactory. That is partly because income support for mortgage interest reduced pressure from lenders and, to some extent, reduced the number of borrowers pressing for improvements in policies.
We recently agreed to a revised code of practice from the Association of British Insurers. About 95 per cent. of mortgage protection insurance is handled by members of the ABI, and by the insurance ombudsman service or the personal insurance arbitration service. A condition of membership of the ABI is adherence to the code of practice, which was revised in the light of recommendations of the independent code-monitoring committee, which includes the National Association of Citizens Advice Bureaux.
The code is now tougher, and it will ensure that the advice given by those who sell insurance policies, or when lenders provide such policies alongside a mortgage, spells out the fine print and details the obligations to borrowers. I hope that that and any further changes that emerge in the course of our consultations will enhance the quality of mortgage protection policies as well as extending their coverage.