Getting on the housing ladder just got harder

First-time buyers in Scotland face fresh obstacles in their bid to secure a foothold on the housing ladder as new lending rules take effect and house prices rise.

The Scottish housing market has rebounded strongly over the past 18 months on the back of a surge in first-time buyer numbers, which hit a six-year high in the final quarter of 2013.

First-timers have benefited from lower mortgage rates as the funding for lending scheme (FLS) pushed borrowing costs down, while the help-to-buy scheme has boosted confidence in the market.

But the launch this weekend of new mortgage lending regulations could put the brake on the recent resurgence. That effect could be exacerbated by an increase in house prices that means it’s taking longer for first-timers to save the deposits they need.

Saving at the current rate of £2,090 a year it would take the average renter eight years to generate the deposit for their first home in Scotland, according to new Scottish Widows research. The figure is still below the UK average of 15 years, which is two years longer than 12 months ago. It blamed the increase on a combination of climbing house prices, higher living costs, soaring rents and low savings rates.

David Lascelles, savings expert at Scottish Widows, said: “While the help-to-buy scheme has no doubt cut down the amount of time you have to wait to buy your own home, and has provided support to over 22,475 households so far, many renters are still facing an uphill struggle to get a foot on the property ladder, or even just to put money aside for the future.”

With house prices rising rapidly in some areas of Scotland, property ownership remains an unrealistic prospect for many first-time buyers.

They also face stiff competition from landlords, as new rules are set to stack the odds in favour of buy-to-let investors.

Under the mortgage market review (MMR), which took effect yesterday and which is aimed at preventing irresponsible lending, borrowers must take extra steps to prove they can afford loan repayments.

Lenders rather than intermediaries are now fully responsible for borrower affordability and must carry out robust stress tests to ensure people could repay their loans at higher interest rates. The change is likely to result in more loan rejections and longer application processing times, experts say.

However, the new rules don’t apply to the unregulated buy-to-let market.

“This summer will see competition tilt back in favour of the landlord,” said Mark Dyason, director of Edinburgh Mortgage Advice. “First-time buyer applications, especially at higher loan-to-values, will come under far greater scrutiny than those by landlords.”

The introduction of the MMR has been accompanied by reports of “gaming”, as borrowers attempt to circumvent the new rules by applying for buy-to-let loans on their own homes.

“The FCA is still keeping an eye on transactions to make sure that residential deals don’t ‘drift’ into buy-to-let to make them ‘work’,” said Dyason. “This is fraud, plain and simple, and should be stamped out.”

First-time buyers are also disadvantaged by the virtual disappearance of interest-only mortgages under the regulatory crackdown, said a recent report by the UK Housing Review. It pointed out that the MMR has created an imbalance in the types of mortgages available that gives landlords a “significant competitive advantage” over first-time buyers.

The report also warned that landlords are benefiting from rising rents that give them a 40 per cent average premium over the cost of their mortgage. In contrast, it found that first-time buyers have to pay up to 15 per cent above the cost of renting to secure a repayment mortgage.

“We are seeing lots of first-time buyers at the moment and what we need to do is help them understand the new process, and manage expectations,” said Dyason.

“To aid this we need solicitors to be as realistic as possible that the time for a mortgage will be longer over this summer as the new rules bed in.”