Mortgage Reforms urged to boost Home Ownership

A think tank is urging the UK government to initiate mortgage market reforms to promote higher home ownership.

The Social Market Foundation - founded by a Conservative peer and led by a former Daily Telegraph executive - suggests that there ought to be insurance for high loan-to-value mortgages and borrowers should be given more information on the possible benefits of longer-term mortgages, such as 30 years.

The SMF’s study looked at housing policy across English-speaking countries including Ireland, Canada, Australia and New Zealand and the UK. 

The SMF found that the UK has the lowest rate of homeownership in that group, and saving for a deposit is the greatest barrier to getting on the property ladder. Britons also have the highest housing costs, accounting for over a quarter of disposable income, the SMF found.

At present, the UK government applies a 2% surcharge on home purchases in England and Northern Ireland by individuals that do not have citizenship or residency. The SMF says this is modest, compared to Australia, where combined excise taxes on non-residents approach 15% in some states, or Canada, where they can reach 25%. 

The Labour party had said in spring last year that it was considering a higher surcharge on foreign buyers and the SMF says that a far higher tax - as much as 25% -  could raise £855m each year.

The think tank also says there are an estimated 1.5m vacant dwellings in the UK at present. Depending on design of the levy, taxing these properties as little as 1% of their value could provide billions in revenue for the Treasury. Both Australia and Canada tax their respective vacant homes as much as 3% depending on their location.

Australia and Canada also fully tax gains made from the sale of a property if it is sold within a year of the purchase, essentially denying sellers the benefit of capital gains tax exemptions. This tax is meant to discourage ‘house flipping’, and if the UK implements it, it would apply to 2.3% of home sales. At current levels, a 50% tax on the profits from house flipping in the UK would raise £550 million per year.

Recommendations from the report to increase access to homeownership include:

·         Provide council tax rebates to private sector renters to help them save for deposits;

·         Offer insurance for high loan-to-value mortgages. In Canada, insurance products are applied to mortgages where the deposit is under 20%, which the SMF argues encourages banks to lend to more low deposit customers and has contributed to a more stable and equitable Canadian market;

·         Require banks to give mortgage applicants information on 10, 15, or 30 year fixed rate deals– longer term fixed rate mortgages are commonplace elsewhere, but not in the UK, and seem to have produced more stable and accessible markets;

·         Reform council tax to make it more progressive, and base it on property values, re-evaluated every three years. Richer households currently pay proportionately less in council tax, and in England and Scotland the rate is based on a property’s value in 1991. No other country in the Anglosphere relies on valuations from more than six years ago;

·         Abolish stamp duty to allow homeowners to downsize and make up the revenue by decreasing capital gains tax exemptions for secondary properties. Though lucrative, stamp duty is paid by the wrong party in housing transactions and prevents efficient movement in the property market.

A spokesperson for the SMF says: “One and a half million homes are left vacant in the UK, while two hundred thousand are owned by individuals who are not residents in the country. At a time when the country is desperate for homes and the government desperate for money, we should be using these as sources of revenue, rather than letting them sit idle. The billions in revenue these taxes could generate should be used to help those losing out in the housing market.