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Building Societies (Special Advances) Order 1980

Volume 415: debated on Tuesday 9 December 1980

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3.28 p.m.

My Lords, I beg to move that the Building Societies (Special Advances) Order 1980, laid before this House on 25th November, be approved. This order increases from £25,000 to £37,500 the limit above which a sum lent to a person by a building society is treated as a special advance.

Under the Building Societies' Act 1962, special advances, which also include all loans to companies, are limited to a certain proportion of all loans made in a year. This proportion is normally 10 per cent., but is reduced if special advances exceeded that proportion in the previous year.

The special advances limit was introduced in the Building Societies Act 1960 for prudential reasons, so as to distinguish between normal loans to finance owner occupation and larger loans which may be more akin to business transactions and thus provide societies with a less secure investment. The Act prescribes that the limit may be increased by order of the Chief Registrar of Friendly Societies with the consent of the Treasury.

The special advances limit was originally set at £5,000 and has been increased five times since then. The present limit of £25,000 was set in 1979. The original figure was chosen as the sum up to which a person might be expected to borrow from a building society so as to buy a house for himself and his family. The limit should therefore increase approximately in line with the increase in house prices and the consequent expansion in the size of building society advances.

Last year the Government felt that the increase in the special advances limit should not only reflect the movement in house prices, but should also take into account the difficulties that home buyers were facing at that time. This year the situation in the housing market has very much eased and the demand for mortgages is much lower. An increase to £37,500 will do a great deal to restore a reasonable freedom of action to the building societies.

Raising the limit will help a number of societies, particularly those operating in the South-East, where high house prices have led to a demand for larger loans which has made the special advances limit a real constraint. Increasing the limit will also save a certain amount of administrative inconvenience for building society branches, which have to go through a special procedure for each loan which is treated as a special advance, as well as for the Registry of Friendly Societies. It will also enable the societies to compete on more equitable terms with the clearing banks and other financial institutions which operate in the home loans market. This does not mean that societies will immediately make more loans of over £25,000 at the expense of lending to first-time buyers, for example. In fact very few societies have been making special advances up to the permitted 10 per cent. of total advances.

The average building society advance in the United Kingdom in the third quarter of 1980 was less than £14,000, and it is reasonable to expect that the vast majority of advances will continue to be well below the limit. The societies make considerable efforts to ensure that first-time buyers and those at the lower end of the market are helped to the greatest possible extent.

Under the terms of the Building Societies Act, societies may work to the new limit in the financial year which begins after the date on which the order comes into operation. Since the financial year of most societies begins on 1st January, the new limit will affect them almost immediately. Other societies will be able to take advantage of the new limit as their current financial year ends.

The special advances limit was originally introduced as a limit for prudential reasons. An increase to £37,500 is fully justified by the movement in average house prices and mortgage advances over the past several years. It will help building societies in competing with the clearing banks and particularly assist those smaller societies which need to make high value loans because of higher house prices in their areas. I invite the House to approve this order.

Moved, That the draft order laid before the House on 25th November be approved.— ( Lord Cullen of Ashbourne.)

3.33 p.m.

My Lords, I should like to thank the noble Lord for laying this order before the House and explaining the contents of the order to the House. Whilst we accept that an order of this kind is inevitable, we must inevitably question the policies which have led to a 50 per cent. rise in the limit in a very short period of time. As the noble Lord told the House, the limit of £25,000 was set only in 1979, some 12 months ago, which indicates a level of some 50 per cent. inflation during a period of 12 months.

Ironically, the figure of £25,000 also relates to the figure at which income tax relief is granted for mortgages. Noble Lords are bound to wonder whether the fact that the Government have made this order today heralds an increase in the limit figure for mortgage relief. I wonder if the noble Lord would care to comment on whether there is any intention by the Government to increase the maximum figure for mortgage relief to £37,500 as well.

I should perhaps comment for a second or two on the noble Lord's remark that the purpose of this order is to restore freedom of action to the building societies. I think that one of the truths which is becoming more and more evident is that the building societies are finding themselves less able to compete with the clearing banks as the clearing banks are becoming able to offer better terms for mortgages than the building societies, and the building societies are not so competitive as they were in the past. No doubt this is a part of the reason for this order. While not objecting to the order, I should be particularly pleased to hear the noble Lord's reactions to some of the remarks I have made.

My Lords, the noble Lord asked why we have made a 50 per cent. increase this year after having made an increase last year from £20,000 to £25,000. Up to 1975 the Government endeavoured to set the special advances limit in relation to the movement in average house prices and advances. The 1979 limit was set rather too low, reflecting the situation in the housing market at that time, and we now feel that a larger increase is called for for this year. If we were fully to increase the limit from its 1960 value in line with the movement in average house prices it would have to be increased to around £45,000, which would be an increase of 80 per cent. A more gradual approach seems called for, bearing in mind the demands on societies to finance the whole range of the mortgage market. By raising the limit to £37,500, the Government are going a long way to restore the long-term relativity.

The noble Lord asked me a rather trick question about the £25,000 figure. I would say that there is no link. It is purely coincidental that the present special advance limit of £25,000 happens to coincide with the tax position on mortgages. I can certainly not give the noble Lord any help in this matter whatever. Regarding the competitiveness of the building societies, I think the reason why the Registrar of Friendly Societies wanted this increase made was for the small companies in the areas where house prices are above average. I hope I have answered the noble Lord's questions to his satisfaction.

On Question, Motion agreed to.