House purchase lending declines in Scotland

Scotland accounted for around 10% of the total number of UK house purchase loans, still a little above the long term average (9%).

The fall in lending was fairly evenly distributed across borrower types.  Loans to Scottish first-time buyers fell by 33% from the previous quarter and home movers fell by 36%.

Lenders have tightened lending criteria further across the UK in response to the worsening economic outlook and funding constraints. This presents the greatest challenge for young, would-be buyers. Scottish first-time buyers typically needed a deposit of 25% in the first quarter – equal to around £26,000*. A year earlier, first-time buyers typically required a 12% deposit – equal to around £14,000. This significant up-front requirement means that only the most affluent borrowers, or those with help from family, are able to enter the market. 

The tightening in loan-to-value criteria also affected home movers, but to a lesser extent. Scottish home movers typically had a 29% deposit, compared with 26% in the same quarter a year ago. 
Income multiples have also tightened, first-time buyers typically borrowed 2.74 times their income, compared with 2.8 in the previous quarter. Home movers typically borrowed 2.51 times their income, compared with 2.63 in the previous quarter.

For those consumers able to obtain credit, affordability is becoming significantly easier. The substantial cuts in interest rates have brought down typical mortgage interest payments, which now consume 14.6% of a typical first-time buyer’s income, down from 16.9% in the previous quarter and 18% a year ago.  Home movers, typically spent 11.6% of their income on interest payments, compared to 14.7% in the previous quarter. 

There were 12,000 remortgage loans advanced in Scotland in the first quarter, a 24% decline from the previous quarter. This is now the ninth consecutive quarter of zero or negative growth, and the pattern and extent of the decline broadly echoes the wider UK picture as borrowers have less of an imperative to refinance in a low interest rate environment.  In addition, lower house prices mean that some borrowers will not meet lenders’ more conservative lending criteria, and so will not be able to remortgage away.

CML Policy consultant, Kennedy Foster said:

“Scotland has lagged behind the UK throughout the decline and as a result may continue to do so when the recovery begins. We expect the pace of decline in lending volumes to slow in coming months and flatten out as we have seen elsewhere in the UK.

“In recent weeks there have been encouraging moves by some lenders in developing innovative products to help would be first-time buyers, but there are still significant funding challenges for lenders and any improvement is likely to be slow and tentative for some while. The continued availability of these products is dependent on lenders being able to access funding lines other than retail deposits.”

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