As mortgate rates rise, deposits remain big issue - David Alexander

Mortgage rates are starting to rise but not to any an extent that it it is likely to suddenly make repayments unaffordable either for existing or aspirational homeowners.

David Alexander is managing director of DJ Alexander

Of much greater concern for first-time buyers at least is the amount required by lenders as a deposit, the sizes of which are substantially more than was the case before the financial crash of 2008. This followed several years of a generally cavalier attitude to down payments by banks and building societies and led to millions of their customers and members suddenly finding themselves living in homes with negative equity – i.e. worth less than the outstanding debt on them.

The majority of those in this situation – providing they did not need to sell quickly or the mortgage lender decided to repossess – managed to regain the lost equity as the wider housing market recovered but having had their fingers burned, lenders did a complete U-turn on deposit policies, seeking from borrowers much larger sums than before.

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Since then raising a deposit has become even more of a challenge for the first-time buyer as the rise in house prices has outstripped those of earnings and according to the Nationwide Building Society, this year a 20 per cent deposit on a house or flat has risen to 110pc of average earnings, up from 102pc in 2020.

This pattern has occurred throughout the “nations and regions of the UK” – as our partly-dismembered country is now described – but there is some comfort for potential first-time buyers north of the Border because Scotland has the lowest (i.e. most positive) ratio of house price to earnings of 3.4 whereas the figure for London was 9. This, of course, means that in Scotland, deposits are likely to be lower in relation to earnings as well. The Nationwide says that assuming would-be borrowers set aside 15pc of average take-home pay each month it would take six years to save for the deposit on an average first-time buyer property in Scotland. This compares with 11 years in South-west England almost 16 years in London.

Of course many young buyers are able to fast-track this by going to the fastest-growing bank in the country – The Bank of Mum and Dad. In 2019/20, again according to the Nationwide, around one third of the deposits submitted to lenders by first-time buyers included a loan or gift of money from friends and/or family or through inheritance, although this was somewhat below the 40pc recorded in the previous year.

Many parents – rightly in my opinion – believe that what they do to help their offspring get on the housing ladder is their business and nobody else’s, least of all the government. Sadly life doesn’t work that way and money given to a son or daughter for a mortgage deposit is considered by HMRC as a “gift” just like any other and therefore might have inheritance tax implications some years down the line. This may, therefore, be something to check out beforehand, especially if any sum involved is relatively large.

STAR CHAMBER

Like many public organisations, “The First-tier Tribunal for Scotland’s Housing and Property Chamber” – which among other things adjudicates in disputes between landlords and tenants – has a backlog of cases caused by the pandemic but it’s still good to see it acting decisively.

One of the latest involved a claim by a former tenant for the return of a deposit of £2,000 following departure from a property in Glasgow. Not only did the landlord not return the deposit but failed to communicate with the tenant – nor indeed with the Tribunal when it formally sought responses.

The end result was the Tribunal ordered the landlord to pay the applicant three times the sum of the deposit, i.e. £6,000, which was the maximum possible sanction within its power.

Almost four decades of dealing with landlords directly has shown me most are reasonable people providing an in-demand service at a fair price (i.e. the market price – no more, no less). Cracking down hard on the relative few who do not play by the rules can only be good for the reputation of the many.

David Alexander is managing director of DJ Alexander

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