SCOTLAND’S housing market is braced for a summer slowdown as lenders impose new restrictions and mortgage costs begin to rise.
Fresh evidence that the recent recovery could be curtailed emerged earlier this week when Bank of England (BoE) figures showed that mortgage approvals had fallen to their lowest level for almost a year. The number of home loan approvals fell to 61,707, down from a recent peak in January of almost 76,000.
The decline followed the introduction in April of new rules forcing lenders to take a stricter line on affordability. And experts in Scotland warn that the changes, which took effect as part of the Mortgage Market Review (MMR), could hit first-time buyers and borrowers with young children particularly hard.
The affordability overhaul means that lenders (rather than intermediaries) must take full responsibility for borrower affordability, with the result that they are scrutinising borrowers more than ever. That involves asking for more paperwork demonstrating their income and expenditure and carrying out stress tests to ensure borrowers can continue to repay their loans as interest rates rise.
While the measures were widely welcomed, fears that they would act as a brake on the housing market already appear to have been well-founded. The main impact has been to lengthen processing times and increase application rejections.
“The extra bureaucracy now involved in securing a mortgage inevitably holds everything up,” said Dr John Boyle, head of research at Rettie & Co.
“An IFA told me last week that his clients were taking about 30 to 50 per cent longer in interviews and checks before getting a mortgage. For the likes of first-time buyers it is a problem, especially if they are servicing debt.”
But perhaps the biggest problem borrowers face, particularly first-time buyers, is a lack of consistency in how far lenders go in checking affordability, according to Lorraine O’Shea, director at Honour Financial Planning in Edinburgh.
“Lenders have their own interpretations, especially Halifax regarding product switches for the same loan amount,” she said.
“There are also differences with pension contributions as they reduce affordability with some lenders.”
The biggest problems are likely to be encountered by borrowers with significant childcare costs.
“Previously there were lenders who did not include this cost in their calculation and now all but one do,” according to Robin Purdie, director of Mov8 Financial in Edinburgh.
“I saw a case last week where the inclusion of childcare reduced the couple’s borrowing capacity by £70,000.”
But Council of Mortgage Lenders chairman Stephen Noakes claimed last week that the impact of the new rules on borrowers has been “minimised”. While Noakes, head of mortgages at Lloyds Banking Group, admitted that application processes were now longer, he denied that they had become excessive.
That may be the case, agreed Purdie, but the uncertainty has had an effect on borrowers.
“I, as a broker who works with lenders every day, know that it’s maybe not as bad as is being made out, but it has undermined confidence a bit among sellers and buyers,” he said.
“It re-emphasises the fact that, if you want your mortgage application (and therefore purchase) to go smoothly, then put it in the hands of the professionals.”
Borrowers have also been warned to expect an increase in mortgage costs. The rate at which banks and other institutions lend to each other has jumped since the Bank of England suggested last month that interest rates could rise later this year.
Several lenders have taken their cheapest deals off the shelves over the past two weeks, with the lowest fixed rates for borrowers with deposits of between 20 and 40 per cent rising particularly sharply, said Moneyfacts.
“The continual stop-start over when BoE base rate will rise has caused swap rates to increase, with the end result now showing in the direct-to-borrower market,” said Sylvia Waycot, spokeswoman for Moneyfacts.
“Borrowers are literally set to pay the price of a rate rise before the BoE rate has in fact risen.”