The Mortgage Market Review and Help to Buy Restrictions Hitting Property Buyers in Scotland

The Mortgage Market Review and Help to Buy Restrictions Hitting Property Buyers in Scotland

Significant changes are afoot in the mortgage market, particularly for high value mortgages and for people looking to move from their existing home using the Help to Buy shared equity scheme. Then, this month the Bank of England’s Financial Policy Committee (FPC) announced new restrictions on bank lending, aimed at slowing run-away house prices in the South of England. And before we drew breath, two of the UK’s largest lenders announced changes that will lead to a serious cutting-back of the Help to Buy shared equity scheme for new build properties. So what are these changes and what effect will they have on the property market in your area?

Last month we looked at the effect that the Mortgage Market Review (MMR), which came into force at the end of April 2014, might have on the length of time it takes to process a mortgage application, plus the likely effect that this would have on the property market in Scotland (for the full article, click here). So what will those, combined with this month’s announced changes, mean for you if you are a property buyer or seller in Scotland?

Changes to general mortgage lending criteria

The changes, at a glance, will be:

a limit, for loans that are large in relation to the borrower’s income, on the proportion of mortgages that a bank can issue: loans worth more than 4.5 times a borrower’s income should occupy less than 15% of a the company’s new mortgage lending;
no new loans at or above 4.5 times borrowers’ income can be included in the Help to Buy mortgage guarantee scheme (not to be confused with the Help to Buy, shared equity scheme for new build properties);
banks must ensure that new borrowers would still be able to afford their loans if interest rates rose by 3 percentage points in the first five years of the mortgage loan.
A consultation period will take place between now and August 31st with the new rules coming into effect on October 1st. More information can be found here.

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So, why are these restrictions being put in place? The principal reason is to avoid excessive household debt. Along with the Mortgage Market Review (MMR) changes in April are true to the Bank of England Financial Policy Committee’s aim to “hard-wire common sense into mortgage lending and ensure that mortgages remain affordable for consumers if interest rates rise in line with market expectations.”

In reality these changes will have no effect on the majority of the population because of the size of loans that are being targeted here, with the majority of lenders already have rules and sense-checks in place for lending levels. They appear to be more aimed at large loans in the South of England where property prices have sky-rocketed from their already high levels in recent years.

Restrictions on the Shared Equity, Help to Buy Scheme for New Build Properties for non-First Time Buyers

We also reported in last month’s May 2014 property market update that there had been indications that the Help to Buy, shared equity scheme for new build properties may be restricted in an effort to help control the property market. However, we didn’t expect that this restriction would take the effect that it has, with lenders rather than policy-makers forcing the change!

As of 24 June 2014, Nationwide, one of the country’s largest lenders, informed its intermediaries (e.g. independent mortgage advisers) that they will only accept applications for Equity Share lending from first time buyers. Halifax, another of the nation’s largest lenders, has also informed intermediaries that it won’t accept applications from anyone except first time buyers. What this means is that the Help to Buy scheme, where the government provides an equity stake of up to 20% in the purchase of a new-build property, will in many cases not be available to anyone other than first time buyers. More: http://www.thisismoney.co.uk/money/mortgageshome/article-2668901/Nationwide-Halifax-curb-Help-Buy-lending-second-steppers.html

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So, over the space of two months, there have been hugely significant changes and restrictions that affect mortgage lending.

What does this all mean? Will it be more difficult to get a mortgage? Will prices head south? That depends…

These changes combined will certainly change the landscape somewhat for next-time buyers, in terms of the choices that they have with regards to the type, and size, of property that they buy.

With regards to the type of property, they will no longer, in many cases, have the additional governmental financial support to buy a new build properties through the Help to Buy scheme, if they were hoping to use the lenders who have withdrawn their support for the Help to Buy scheme for second-time (or further-time) buyers. So, if a buyer was looking at a £500,000 new build property, perhaps slightly more expensive than they could afford in the second-hand property market, and they were hoping that they would be able to afford this because of the Help to Buy assistance, they might find themselves having to look again at a slightly cheaper property in the second-hand market.

With regards to the size or value of the property, they may also face tighter lending restrictions if they are buying a very high value property and seeking a huge mortgage. In reality, in Scotland, this is less likely to be a problem in the way that it will be in the South of England, but it’s certainly worth taking professional advice if you are looking for a particularly high value property or loan.

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In short, if someone was looking at buying a larger, new-build property and this was only affordable for them because they were able to get the up-to-20% contribution from the government towards this new home, they will no longer be able to afford to move. This may, of course, also entirely put the brakes on their desire to move and therefore prevent them putting their existing property on the market.

Does all of this mean that prices are likely to head south? What should you do if you are worried that these changes might affect your ability to move?

These mortgage changes are all designed to ensure that people do not take on more debt than they can afford. The effect of this may be to create a slight slowdown in the rate of mortgage approvals. There have been reports already this month that mortgage lending is flattening slightly: http://www.telegraph.co.uk/finance/personalfinance/houseprices/10911128/Mortgage-lending-flattens-as-rate-rise-threat-deters-buyers.html.

There have also been reports of elongated timescales for mortgage approvals in the wake of the Mortgage Market Review (MMR) changes.

Whilst there may be a small effect, in the short term, on the number of people who are in a position to move home, for the most part we are still seeing the demand for property outstripping the supply of new property coming to the market. We therefore aren’t hugely concerned that this will have a big impact on the market north of the Border.

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It is more likely that these changes will, in fact, achieve the goal that they set out to achieve: to slow down the rate of house prices rises, particularly in the South of England, something that appears already to be on the cards according to recent Press reports.

If you are a high earner and looking to take a large loan to purchase a home, or if you were considering taking advantage of the Help to Buy, shared equity scheme, to fund a purchase that wasn’t a first-time buy, and you are concerned about the impact of these changes on your own ability to move home, we would strongly recommend taking professional mortgage advice.

I'm Robert Carroll, Managing Director of MOV8 Real Estate, Estate Agents and Solicitors. MOV8 is an innovative and forward-thinking estate agency and solicitor firm with its Head Office in Edinburgh, UK. It is one of the fastest growing firms in the east of Scotland. I see first-hand every day what is actually happening in the property market and am regularly quoted in the Scottish Press in property stories. Through this blog I aim to give an honest, fresh and sometimes light hearted take on what is happening in the Scottish property market for anyone who is interested in that kind of thing...

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