Mortgages.scot

A recent look at the first-time buyer market in Scotland shows the struggles due to the high demand for property, especially in the main cities. Despite having managed to save for a deposit and get an agreement for a mortgage, many buyers are losing out as they can't bid over the valuation amount.

The home report valuation is only a guide

Since 2008 every property being sold in Scotland must have a home report. The current homeowner arranges and pays for it. Essentially a good idea, that way each interested party does not have to arrange and pay for their own valuation.

The issue is that when there is strong demand people are willing to pay more where they have the funds available.

For example, a flat in a city location where the home report valuation is £150,000 is likely to sell for up to 20% more than that depending on the interest it has.

The mortgage lenders' view

A large contributor to the issue is that mortgage lenders only focus on the home report valuation not what the buyer pays for it. In the case of a property valued at £150,000, a lender will only lend against that value.

So as an example, a 1st-time buyer may need a 10% deposit as part of their mortgage approval. That would be £15,000 and they may have that, so all good right? Yes, but only if they can buy the property at £150,000.

What if they have to bid £170,000 to secure the property? That is where it all falls down for the 1st time buyer. Even if they could then meet the lender's affordability requirements at that level and have the money to pay a 10% deposit of £17,000, the lender does not look at it that way.

The lender still only sees the home report value of £150,000 and will only lend against that value. In the example above they will grant a mortgage based on a purchase price of £150,000 supported by a deposit of £15,000. If a buyer agrees to pay £170,000 for the property then that additional £20,000 must be paid by the buyer, therefore, increasing the up-front money required from £15,000 to £35,000.

Recent research by the Bank of Scotland suggests that a 1st-time buyer in Scotland should be aiming to have a deposit of £41,442 and that is average!

1st-time buyer struggle

For the 1st-time buyer, the struggle is real. It takes a lot of effort for many to get to that minimum 10% deposit level, or even 5% if the mortgage products are available. But when they get there and find they then need up to another £20k means the possibility of never getting there.

What makes that worse is that in the time taken to get more money together, often years, property prices have gone up more and it feels like a losing battle.

Not everyone has the luxury of having mum and dad to help, or living at home and not paying rent. many are having to pay rent as well as try to save.

Is there a solution?

In honesty, not really. An element of the property market that will never go away is that buyers will pay more if they can to secure a property. Some are more fortunate than others in being able to do so. If there is strong competition for property and someone is willing to bid far in excess of the home report value you either compete with them to get the property. If you can't then you won't get it.

The only real option is to bid for a property at a level where you could go over the home report value to secure it.

The struggle is real for 1st-time buyers, that is for sure.