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For most people, a mortgage is their biggest financial commitment. Interest rates are the main factor influencing the costs of acquiring and servicing a home loan, but the prospect of an independent Scotland introduces other risks for Scottish borrowers.
What effect would an independent Scotland have on my mortgage?
The long-term impact would depend very greatly on the outcome of negotiations between Holyrood and Westminster on vital questions such as use of the pound and regulatory arrangements. But Scotland’s lack of history as an independent player on international markets and the experience of newly independent small countries in recent times suggests its overall costs of borrowing would rise. This could cause a rise in swap rates, which lenders use to price fixed-rate mortgages. Attractive deals may become fewer on the ground.
Would lenders switch existing mortgages into a Scottish currency if the politicians decided to create one?
Banks in the rest of the UK would have little to gain from doing this and a lot to lose. More likely they would leave the risks of a new currency firmly with their customers. After more than five years of ultra-low interest rates set by the Bank of England, Scottish borrowers could potentially face both higher interest rate and currency risk.
If a new currency dropped against the pound, this would bring two concerns for sterling-denominated mortgage borrowers north of the border. First, would they be able to afford their mortgage if monthly repayments rose by, say, 10 or 20 per cent? Second, a local currency slide against sterling would cause the value of their asset to drop relative to the loan.
“This could be all the difference between having equity and having no equity,” says Ray Boulger, director at mortgage broker John Charcol. If loan-to-value ratios rose as a result, lenders might be forced to set aside more capital to make up the difference – a reason why some might choose not to stay in the market.
So some lenders might simply leave Scotland?
Uncertainty is a big factor behind the willingness of providers to lend, says Andrew Montlake, director at broker Coreco.
“In the past, lenders have said, ‘Let’s pull out for now, until we know what’s happening.’ There’s every reason to believe that could happen again.”
Lenders in the rest of the UK would face extra complications in managing Scottish home loans in the event of a different currency and regulatory system.
David Hollingworth, director at mortgage broker London & Country Mortgages, said: “The legal rules are already different – if you start getting a change in currency and regulations, that may complicate things to such a degree that smaller mutuals decide it’s not worth pursuing.” Competition would suffer in the short term, giving remaining lenders less incentive to offer attractive deals and rates.
Bigger lenders might, however, decide to expand their Scottish business, instead setting up subsidiaries funded entirely from their Scottish mortgages.
A quick fix?
Is it worth Scottish borrowers fixing their mortgage as a hedge against these risks?
Brokers believe there are strong arguments for some borrowers to fix their mortgages now even if the currency question remains unanswered. UK lenders are jostling for business, cutting their rates on fixed-term home loans in an effort to hit their end-of-year targets.
Those with reasonable levels of equity in their property may benefit from remortgaging in a highly competitive market. But first-time buyers or those seeking a higher loan-to-value mortgage at the edge of affordability may decide there are still too many unknowns to jump into the market.
What about house prices?
The No campaign argues jobs would inevitably move south in the event of a Yes vote, affecting Edinburgh in particular with its large financial services industry. A drop in house prices in the city would be one likely consequence. But with a renewed focus on the oil and gas industry, centres of energy sector expertise such as Aberdeen, which has seen double-digit house price increases in the past year, might see further gains.