Mortgage Market Briefing February 2023

Your Questions Answered

• Is it the right time to buy first house or should I wait for few months?

  This depends on your circumstances. Our general advice would be to buy if you can afford. Although the market may drop, it will take time to recover and housing remains a good long-term investment. Trying to guess the bottom of the market could mean you end up paying more rather than less.

• Have you noticed Edinburgh property values dropping after the rise in interest rates?

  Not immediately but it is likely they will drop back over the course of the year. Our current forecast is around a 5% reduction based on current assessment, which is subject to change.

• How do you anticipate flat prices moving in Edinburgh during 2023 in the first-time buyer space?

  There is likely be some reduction as mortgage tightening will affect demand but there remains strong demand for urban living among young professionals, fulled by rising in-migration of YP to the city. We would not expetc any sharp contraction in demand or pricing.

• What are my first steps to buying a small flat in Edinburgh for personal use and vacation rental?

  You may not be aware but there are number of regulations around mortgages when it comes the use of the property. If you plan to buy the property with a mortgage then this can be done using a residential mortgage, by doing so the conditions stipulate that only you and your immediate family can stay in the property, it cannot be used for short term letting as this would be deemed a breach of your mortgage contract. Flipping this over and looking at it as a holiday rental, again it’s within the conditions of the mortgage offer that its can only be used for short terms lets, and you are not allowed to stay in the property. Another way to view the purchase would be to raise the cash say against your main residential and buy the property outright allowing you do let it out, and stay in the property without any conditions.

• How does the material that you plan on covering if an individual is on skilled worker visa?

  Skilled workers can apply apply for a mortgage subject to an LTV cap of 90%, along with having a min 12 months or more on the visa.

• Can I get mortgage without a deposit?

  Sadly the 100% mortgage is a thing of the past. That being said, there are mortgages known as Springboard from Barclays, this would involve a parent/guardian placing money aside with Barclays which would be returned once you have 5/10 equity in the property. During this period those who gifted the deposit would earn interest.

• Do you forsee a wave of repossessions similar to that which followed the 2008 financial crisis?

  Repossessions will rise but probably not as much as 2008 as lenders are better capitalised and prices did not run away to the extent they did before the last crash. Repossession is very much a last resort by lenders and will be only a small % of total lending in a given year.

• What are my Mortgage options as a sole trader?

  95 LTV, subject to 2 years accounts, 90% withone years account. all subject to credit score.

• Is it ok to buy second homes when the interest rates are high and when are the interest rates are likely to come down?

  Its fine to buy a 2nd home, I would encourage you to be mindful of ADS, which is now at 6% in Scotland. With rates coming down, this isn’t going to happen overnight, this is going to be 6–12-month journey. Even then we are looking at very small changes over that period. I think we can expect mortgage rates to settle in and around 4% on average.

• I want to purchase a flat to move into in approx 3 years’ time. How can I reduce risk of being unable to remove tenant when I want to move in? Also is it better to use bank finance (ie mortgage) or release equity in my only other property?

  From a mortgage perspective, it is cheaper to secure a mortgage against your own property, that being said you now place all of the risk on your main residential if something goes wrong. With this in mind, it would be preduct to spread your risk and have a BTL mortgage. Let me ask you this, would you rather someone repossessed your house or the BTL?

• Is a market correction inevitable in the coming months?

  Yes, there will be a correction over the next year - our current estimates are for average prices to fall 5% and transactions by 15% due to economic headwinds.

• What options do I have if I want to pay my mortgage off faster, e.g. extra payments every year on top of monthly instalments?

  This is something we actively encourage, most lenders allow you to overpay 10% of the mortgage every year without any penalties, this long term allows you to pay off the mortgage sooner and can save thousands on interest. It’s worth checking with your lender on how these payments can be made, and what there limits are per/month/year.

• I’m interested in your views on the maximum age mortgages typically go to, including Buy to Let and Residential, compared with arranging through a Ltd company.

  Most residential mortgages are capped at age 70, that being said there a few lenders that consider going to 75 and age 80. When you think residential, we have to consider can you still work at the same pace as you could in your 30's. As for BTL, there is no age requirement as such, as the rental income would support the mortgage. As for LTD again there is no age, as the Company itself own the property (BTL) therefore the asset can pass from generation to generation or be sold.

• How can I get 5% deposit avail with only 2 years of credit history in UK

  This is possible, however you would need to earn 100K, and pass a credit score at 95%, if this isn’t possible we do have a number of lenders that would consider 90% LTV.

• Why is it more challenging to get an interest only mortgage or a top up interest only mortgage, does it relate to the new assessments for mortgages?

  IO mortgage became more difficult to secure after the MMR was introduced in 2016, The FCA changed the rules on how you could repay a mortgage, along with how this should be monitored/evidenced of the term of the loan. Because of this a lot of lenders exited the IO Market. You can still secure an IO mortgage, those lenders that do offer then have either/mixture of income requirements or equity requirement along with a cap on LTV.

• Looking at the Scottish housing market, where do you see the demand increasing in the next five years? What size of apartments etc.

  There is a demand/supply imbalance in Scotland across the board, but probably a greater imbalance for family properties in city locations as well as downsizer housing. The flat market remains active as city centres move to being liveable areas again.

• Why do banks penalise you for letting your property out? Why are banks allowed to refuse you a fixed rate mortgage when you become tax resident abroad?

  Banks look at BTL from a risk point of view, they know if you are staying in the property its more likely you will maintain the property, this is true when compared to it being let out. Therefore, BTL’s are seen as riskier. this is seen again when/if it comes to repossession, there is a longer more costly process to evict a renter than the owner. As for FN, this is again down to risk, if you are in the UK the Bank can chase you for debts, court cost etc. With you being an expat, the bank has recourse unless you return the UK. Hence why for FN/Expats there is an increased cost.

• What type of mortgage would you recommend securing in the current climate?

  I would say this comes down to the individual and short/medium term plans along with your attitude to risk when it comes to your mortgage.

• What is the direction of travel on interest rates and house prices?

  Interest rate rises may have peaked, but could go up to 0.5 base points higher this year before reducing. Average prices expected to fall 5% in 2023 and probably another smaller reduction in 2024 before recovering.