Eurozone uncertainty sees mortgage costs edging up

The Scottish housing market faces a summer of retrenchment that could send both sales levels and house prices slipping downwards, experts have warned.

Continued uncertainty over the eurozone is beginning to drive up mortgage costs and restrict availability of loans to first-time buyers, with more major banks tightening lending criteria in recent days.

Fears grew for the housing market in Scotland yesterday as Council of Mortgage Lenders (CML) figures showed a fresh decline in the number of mortgages given to Scots households in the first three months of this year.

First-time buyers accounted for a record proportion of loans given in Scotland over that period. But the number of loans to first-timers was down on the previous quarter, despite a rush to beat the end of the stamp duty holiday in March, as reported on Page 10 of The Scotsman today.

And housing market activity in Scotland is likely to continue falling off over the coming months, said the CML, echoing warnings of further hikes in mortgage costs as the eurozone crisis rumbles on.

Capital Economics has predicted that a Greek exit from the eurozone could push mortgage rates up by as much as 1 percentage point as lenders pass on higher bank borrowing costs to homeowners and tighten their lending criteria.

Lenders including the Halifax, Clydesdale and Co-operative have all hiked their standard variable rates (SVRs) this month and others have begun to raise their fixed rate mortgage costs. The UK’s two biggest mortgage lenders, Santander and Halifax, have both moved to restrict first-time buyer mortgages over the past two weeks, the latter withdrawing its two-year product for buyers with 10 per cent deposits.

Any further tightening in criteria could drag house prices down by squeezing more first-time buyers out of the market, hindering activity further up the chain and forcing sellers to lower asking prices.

Dr John Boyle, head of research at Rettie & Co, said: “Lending looks likely to be tightly rationed for some time. The eurozone crisis hangs over the banks as well as their other more immediate problems such as dealing with bad loans and new regulations.”

And stable market conditions will remain a distant prospect unless the European Central Bank takes the necessary measures to boost confidence in the eurozone, Boyle added.

“Mortgage rates are edging up, but only slowly, and this pattern will probably continue for the next couple of years if we go on as we are,” he said.

“Another full-scale international banking crisis would see everything going haywire again, which is likely to mean mortgage rates rising sharply before a correction of some sort.”

Robin Purdie, director of Mov8 Financial in Edinburgh, is more optimistic, however. “Lenders have increased rates since the start of the year, so this may have an effect on the market in general over the coming months, as might the eurozone uncertainty,” he said.

“But, based on the level of enquiries that we’re seeing at the moment, there seems to be plenty of activity going into the second half of the year.”

Meanwhile, the City watchdog has ruled out a blanket ban on interest-only mortgages. Most major banks and building societies have limited interest-only loans over the last year – or withdrawn them altogether – as the Financial Services Authority plans a clampdown on the way lenders assess borrower affordability.