The housing market in Scotland has been showing increasing confidence in the last few months with stabilising prices, better access to mortgage finance and, in Q2, a five-year high in lending to first-time buyers.
In fact, though Scotland accounts for only around 8% of the UK population, it accounts for nearly 12% of UK property purchases in the second quarter of 2013.
However, things are still shakier than south of the border. The average house price in Scotland is some £50,000 lower than the rest of the UK (£25,000 when Greater London is excluded) and short- and long-term price movements have shown more volatility.
The possibility of an Independent Scotland following next year’s referendum only complicates projections. Opponents of independence argue that the cost of mortgage funding could increase; that a separate currency could lead to higher interest rates (whilst remaining with the sterling or joining the euro would remove monetary control from Scottish parliament); and that uncertainty has already discouraged investment in expensive properties. Proponents, meanwhile, argue that an independent Scotland could do more to promote house building and help people into new homes than Westminster is presently achieving.
Buy-to-let mortgage availability in Scotland
Despite the question mark hovering over the near future, the fact is that at present, whilst the legalities of property purchase in Scotland are slightly different to the rest of the UK, the finance available for doing so is largely the same. The majority of high street buy-to-let mortgage lenders offer their products to borrowers in Scotland and as matters improve smaller and more specialist lenders are beginning to follow suit. Notably, Aldermore – the England-based ‘challenger’ bank – extended its full residential and buy-to-let product ranges to Scottish customers in June. This broadly means that most products available to the rest of the UK are now also available to Scottish investors.
Capital repayment or interest-only?
Like in the rest of the UK, mortgage interest can be offset against rental profit as a deductible expense when calculating income tax. Though it can only be offset against rental income, and not income from other sources, losses from a rental business can be carried forward and offset against profit in future tax years. As such, interest-only mortgages are more feasible for landlords than for owner-occupiers even though the interest rates on buy-to-let mortgages tend to be higher.
Repayment mortgages are more tax efficient earlier on when interest accounts for a higher proportion of repayments. Towards the end of a mortgage term, very little of a repayment will be interest.
In the long term, the interest savings made by repaying capital always outweigh the tax savings by not; however, each landlord invests with a different goal in mind and some prefer to maximise their income in the short term. With the uncertainty as to where Scottish house prices are headed, many may be disinclined to invest in equity that may no longer be there in the future.
The maximum LTV (loan to value) for a buy-to-let mortgage is 85%, and it could be argued that 15% equity is a safe enough hedge against the probability of a price crash. However, interest-only is a higher risk, and you should be sure that you have a credible repayment strategy if you take out a buy-to-let loan on an interest-only basis.
Fixed or variable interest rate?
Mike Carney, the new Governor of the Bank of England, stated that interest rates will not rise until a number of criteria are met; chief among is the unemployment rate falling to 7%.
This was originally not predicted to occur until 2016, but recent headway made in the economic recovery has led many to speculate that rates might in fact rise earlier. As such, landlords in the UK are advised to ‘stress test’ their buy-to-let portfolios to ensure that they could withstand a sudden hike in rates and to have a back-up plan or consider switching to a fixed rate if they could not.
As it is uncertain whether interest rates in an independent Scotland would be controlled centrally, we cannot speculate as to whether Scottish mortgages would be tied to the same base rate as those in the rest of the UK. The trend for rates in any strengthening economy is upwards, however, and landlords investing in Scottish property should consider this when deciding on the best buy-to-let mortgages.
Buy-to-let mortgages for student properties
Student properties can offer a lucrative income for landlords – large terraced properties in or near the centres of big university cities like Aberdeen, Edinburgh, and Glasgow are ideal. Bear in mind that if more than three persons comprising three separate households will use the property as their main and only residence and share some basic amenities, it will be legally classed as an HMO (house in multiple occupation). There are special legal requirements for managing an HMO property, and you will also need a specialist HMO mortgage.
Buy-to-let mortgage underwriting in Scotland
The underwriting of buy-to-let mortgages in Scotland is much the same as in the rest of the UK; they are granted on the basis of potential rental income, which is determined by a surveyor and usually needs to cover between 120 to 130% of the mortgage interest. Depending on your lender, the interest used will either be that of the product for which you are applying or the lenders SVR (standard variable rate) plus a fixed differential.
The exceptions to this are if you will occupy some of the property yourself, intend to occupy it partly or wholly in the future, or if your tenant will be a close relative such as a parent, grandparent, child, grandchild or sibling. In these cases, the sale will be regulated – you will need to provide evidence of income, income multiples will be used when calculating affordability and, as of April 2014 (when the Mortgage Market Review comes in to force), affordability will need to be ‘stress tested’ for potential interest rate increases.
You will typically need a deposit of around 20% for a rental property, but there is some flexibility and buy-to-let lenders can go as low as 15%. Generally, the larger your deposit, the lower the interest rate will be; the most competitive interest rates are available at LTV ratios of 60% or lower (i.e. for deposits larger than 40% of the property value).
Whilst the general advice given in this article is a good starting point, each investor’s situation is different and will require a specific product or products for an individually tailored strategy. It is best to seek impartial advice from a whole of market, buy-to-let mortgage broker, who will be able to review your circumstances and recommend the most appropriate product for you.
Written by Ben Gosling, a copywriter at TurnKey Landlords.