Tax change and low rates raise stakes for home buyers

The property market will be disrupted when stamp duty is replaced in April. Picture: Ian Georgeson

Activity will be boosted further by an ongoing price war among the UK’s biggest lenders that is pushing mortgage rates to new lows, according to some of Scotland’s leading housing market experts.

And while concerns linger over the ability of lenders to handle the tax changes coming into effect, the consensus is that 2015 will see both sales and house prices continue to rise.

The Royal Institution of Chartered Surveyors (RICS) Scotland predicts a 4 per cent increase in Scottish house prices over the coming 12 months as demand continues to outstrip supply.

That has implications for the private rented market, however, particularly with few affordable homes being built. Scotland’s average rental prices hit a record high in November, according to Your Move, pushing more tenants into arrears and adding to the difficulties first-time buyers face.

But some first-time buyers will benefit from the property tax reform. That will see the existing stamp duty replaced north of the Border by the land and buildings transaction tax (LBTT), which will cut costs for people buying homes worth less than £325,000.

Here’s what our experts think we have in store this year:

Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh: It will be a very interesting year. Interest rates are still low and look set to stay that way for the short term at least, leaving the housing market hopeful. With new plans coming in for “brownfield” and government schemes still offering first-time and “next-time” buyers the chance of getting their new homes, this should keep prices stable in 2015.

The LBTT changes are already having an effect. People who had planned to buy later in 2015 are bringing it forward, so it’s inevitable that we will see a surge of new purchases prior to April as the LBTT will increase the costs on any purchase over £325,000.

House prices will continue to grow and the schemes will continue to help first-timers get their new properties. But if you’re buying your first home be careful that the government funding isn’t used up too quickly after the new tranche of money is made available after 5 April. Get in quick.

Robert Carroll, solicitor and managing director of MOV8 Real Estate: The introduction of LBTT for property purchases that complete on or after 1 April will have a significant effect.

For properties valued up to £254,000, there shouldn’t really be much of an impact. If anything, buyers might want to push their date of entry back a little bit so that they can take advantage of the small saving that LBTT offers versus Stamp Duty.

For properties over £254,000 – and particularly when you get up to about £400,000 and £500,000 – the effect of the change is much more extreme, with buyers saving several thousands of pounds if they complete before April.

I would therefore expect a rush of activity in the first quarter of 2015, particularly for property sellers putting their properties on the market, and for there to be a bit of a lull around April and May before the market fully recovers.

For first-time buyers the outlook is positive. Lenders remain hungry to lend, and this is reflected in the products available to those with 5 and 10 per cent deposits.

In terms of issues to watch, one that stands out for me is the LBTT changes and mortgage processing. The vast majority of those who have an offer accepted any time before mid-March will want to complete before 1 April. This means that selecting the correct lender is imperative, because processing times can vary hugely between them all. Some lenders can produce mortgage offers within a matter of days, and some take weeks on end.

Ian McGrail, managing director, First Mortgage, Edinburgh: Scotland’s housing market suffered a notable slowdown ahead of the independence referendum, but we’re now seeing an increase in activity and expect a very busy start to the new year. The outlook for first-time buyers in particular is positive.

The transition from a “slab tax” system towards a more progressive property tax could result in approximately 50 to 70 per cent of house buyers being excused from paying LBTT. This could potentially be a significant advantage for individuals looking to climb on to the property ladder as well as those on low incomes.

The new LBTT system is designed largely to help first-time buyers, with the threshold for LBTT set at £135,000, up from the stamp duty threshold of £125,000. But others will pay more as a result of such a change. Buyers in Edinburgh, where the average family house cost £363,000, will pay £13,600 in tax under the new system, 25 per cent more than they would pay in stamp duty. We therefore expect a rush of transactions being settled before the new rules come into force for those that would be penalised.

Homeowners, first-time buyers and those looking to re-mortgage still have an opportunity to benefit from cheap mortgage deals. Fixed rate mortgages are looking particularly attractive and may get cheaper still. But it’s important to be wary of a possible interest rate rise predicted for the latter part of the year, so early on is a good time to capitalise on the deals currently on offer.

David Alexander, managing director of the letting and estate agency, DJ Alexander: Many middle- to upper-market properties will soon come on to the market as homeowners try to beat the new LBTT rates, but with so many vendors competing against one another some will inevitably fail to sell by the April deadline.

With potential buyers then unwilling to pay the draconian tax rates, there will be a surplus of homes in this category, some of which may take years to sell. This could lead to a return of “reluctant landlords” (unsuccessful sellers who have no alternative but to rent out their homes).

Last year was an extremely good one for the conventional rental market but even here there is a cloud on the horizon– the threat of rent controls. This would be a disaster for Scotland by chasing away investment and leading to a shortage of private rental properties which now play a vital role in housing individuals, couples and families.

For example, why would anyone invest in a Dumfries rental market subject to rent controls when such restrictions did not exist just over the Border in Carlisle?