With the polls narrowing, no one can dismiss the possibility of a “yes” vote in the referendum on Scottish independence on 18 September and the implications for the mortgage markets both in England and Scotland could be significant.
If there was a separate Scotland with a separate currency, would Scottish lenders stop lending in England? Would banks currently located in Scotland choose to move south of the border? Would there be a successful currency union with Britain and would an independent Scotland even be able to rejoin the European Union.
However, with the referendum now such a politically charged issue, many mortgage lenders are wary of discussing any of these questions and what the impact of a yes vote would have on lending.
Out of a dozen lenders contacted by Mortgage Strategy, only the Penrith Building Society was prepared to grant an interview. Scottish lenders like Clydesdale Bank, The Scottish Building Society and Airdrie Savings Bank justify non-participation on the grounds that it is essential to maintain a neutral stance on the referendum issue and that any comments could be misconstrued as offering political opinions.
Those with lending operations based in England do not spell out their motives but could have similar concerns. It is also possible that the focus on the Mortgage Market Review simply has not allowed them time to give sufficient thought to the issue. Lloyds Banking Group is at least willing to provide some comment.
“There are no immediate issues that will affect our customers either in Scotland or the rest of the UK, particularly as any changes in constitutional arrangements are unlikely to come into effect until 2016 – so we will have 18 months after the vote to be able to fully assess the specific implications,” it said in a prepared statement to me. ”In the meantime, our focus is on continuing to serve
Fortunately, there are intermediaries and other independent commentators willing to express opinions although these are largely hypothetical due to so many unknown factors.
The most critical of the unknowns is clearly the actual referendum result but, even if we speculate that there will be a yes vote, we still don’t know what currency, taxation and regulatory systems an independent Scotland would adopt, what level of interest rates it would manage to maintain and whether Lloyds and Royal Bank of Scotland, which are legally based in Scotland, would relocate to the UK.
Furthermore, a seeming insistence on the part of Scottish National Party members to be in denial on fundamental economic realities does little to further the cause of worthwhile debate.
The currency issue
An issue of paramount importance is obviously what currency an independent Scotland would adopt because joining the euro or establishing its own independent currency would effectively mean that Scottish borrowers with English lenders and English borrowers with Scottish lenders would take out foreign currency mortgages. Due to the risks involved, these have traditionally met with little demand other than from high-net-worth clients.
London & Country Mortgages associate director for communications David Hollingworth makes the point that it would take a sophisticated borrower to take a foreign currency mortgage because if exchange rates move against the customer, then their debt increases if they derive income in a foreign currency.
“The majority of our mortgage lenders don’t offer them as there is no demand in the UK and they don’t have the infrastructure to get involved overseas,” he says. “If there was a separate Scottish currency, I think English lenders would stop lending in Scotland and possibly Scottish lenders would stop lending in England.”
As the vast majority of business conducted by Scottish mortgage brokers is via English-based lenders, Scottish borrowers could be left with far less choice.
Mortgage Advice Bureau head of lending Brian Murphy says a separate currency would present a whole series of administration, systems and logistical issues to UK lenders. “They would have to start tweaking their systems to deal with Scottish homeowners and there would be a significant cost so they could withdraw,” he says.
Although the Scottish Government insists an independent Scotland would be able to maintain a currency union with England (see box), the fact that the English government and major opposition party leaders have ruled this out would seem to make it a non-starter.
An independent Scotland would automatically leave the the EU and all 28 members would need to vote it back in.
However, John Charcol senior technical manager Ray Boulger argues that this may not be as easy as it first sounds.
“Some countries like Spain, which faces a lot of pressure for independence from the Basque region, might well vote against allowing it to join because of the example it would set,” he says.
The most likely scenario would seem to be an independent Scotland choosing to shadow the pound either by carrying on making informal use of sterling without the support of the Bank of England or via its own currency.
Although shadowing would still technically create foreign currency mortgages for cross-border borrowers, if it was done effectively, the impact could be minimal in the short term.
However, severe difficulties could arise if the economies in due course start to diverge, and this could lead to higher interest rates in Scotland.
Recent analysis by the UK Treasury, using International Monetary Fund and other external data, suggests that the Scottish Government’s own estimates in its White Paper understate the likely size of its deficit in the first year of independence by over 2 per cent points of GDP.
The Treasury analysis shows that in 2016/17 a Scottish fiscal deficit of 5.5% would be equivalent to £9.5bn or £1,760 per head, which is around £1,000 greater than the UK’s deficit per head in the same year.
The Wriglesworth Consultancy’s head of housing and mortgage market research Rob Thomas says with either of the shadowing options mortgage costs in Scotland are likely to be higher as the perceived strength of the Scottish economy is weaker than the English one.
”Scottish government bonds would have to pay a higher rate of interest, and fixed rate mortgages are likely to be more expensive as they typically reflect higher bond rates,” he says.
“Personally I think the vote outcome will be ‘no’ but if it was ‘yes’ in my view, looking at the facts as we see them at the moment, Scotland would be worse off. Scotland is running a bigger deficit that the rest of the UK and as a small economy will find it harder to finance that deficit, even taking into account North Sea oil, the revenues from which have been reducing.”
Regulation and relocation
Regulation is also a huge issue. As an independent Scotland would probably want to at least leave the door open to joining the EU, it would have to by law have its own financial regulator.
Even if this simply chose to mirror the UK regulatory system, it would still involve an additional layer of expense.
Capital Economics regional economist Richard Holt says UK lenders lending to Scotland could be subject to two different regulators, which would involve an extra cost.
“A different tax regime in Scotland to the UK will be much more complex, so again someone will have to pay. Combined with potential currency issues, the solution for all the Scottish banks could be to shift their legal head office to London. It would probably deal with most of the issues but we can’t be sure.”
Thomas takes the view that the large banks currently headquartered in Scotland would probably want to move if there was a yes vote. “If the Scottish regulator wasn’t big enough to bail them out in the event of a crisis, it would increase their own cost of borrowing, so they would therefore prefer to be bailed out by the Bank of England,” he says.
Relocation is also likely in view of the imminent introduction via a range of EU legislation requiring companies to have their head offices in countries where they to do most business.
However, lenders which remain based in Scotland could at least be spared having to comply with the EU mortgage directive, due to be implemented in March 2016.
One of the biggest issues posed by this directive is the need to change key facts illustrations to European standard information sheets. There are 46 items in the Esis that are not in the KFI and 44 items in the KFI that would need word changes.
No gazumping and no problem
Speaking to advisers with a major interest in Scotland, neither Scottish nor English mortgage borrowers seem to be unduly concerned about the wealth of issues that could be lying just around the corner.
Mortgage Advice Bureau, which has a handful of appointed representatives in Scotland, has not had any feedback to the effect that borrowers are asking about the issue.
Edward Wilson Financial Services is a whole-of-market mortgage broker near Aberdeen and its principal Edward Wilson says he has only had one query on the subject.
“My personal guess is that I don’t think Scottish independence would make a great deal of difference to interest rates or property values, particularly around Aberdeen, where demand outstrips supply, and I would think that a property shortage is likely to have a more long-term effect than a yes vote,” he says. “I don’t think there would be much difference with the deals on offer if we shadowed the pound and in general terms I think England and Scotland would look at ways to trade rather than to set up trade barriers.
“I haven’t lost a moment’s sleep over it all and nor have my clients but the main impact may be the time involved with admin, as there could be some extra boxes to tick. Any changes we’ve had to absorb over the years from a regulatory point of view we’ve dealt with and bounced back and I think we would continue to do that. Life goes on and people invariably find a way to cope. We are just sitting here number crunching and we get the money from whoever is most suitable and that will continue.”
A commonly highlighted issue by those determined to keep the whole matter of independence in perspective is the fact that Scotland has always had a separate legal system. For example, it has a legally binding contracts rather than exchange of contracts and is largely immune from gazumping and gazundering.
At Glasgow-based law firm Dallas McMillan, associate solicitor Yvonne Burnham says the main reason gazumping and gazundering are not practiced in Scotland is that the practice rules of The Law Society of Scotland prevent it although there are no such restrictions on sellers or purchasers. “If a solicitor suspects their client is indulging in such practices, they must step down and the client will need to appoint a new solicitor,” she says.
But both Scottish and English mortgage brokers who have done cross-border business report that such differences have never really presented them with any really significant cost or aggravation.
Why therefore should other differences such as a separate currency or regulatory system? Mortgages could be one of the industries least adversely affectedby any potential separation. Penrith Building Society chief executive Amyn Fazal stresses that an independent Scotland would merely be one of a range of factors he would take into account if he was considering expanding into Scotland. Based only 30 miles south of the Scottish border, the Penrith has done very little Scottish lending to date but does not rule out expanding in this area.
“I have a whole project list, of which Scottish lending is merely one consideration, and I can’t do everything at once,” he says.
“While the outcome and implications of Scottish referendum aren’t known, and we are entirely neutral on the topic, we certainly wouldn’t rule out doing business with Scottish homeowners in an independent Scotland. But even if there was a no vote, we may decide not to do anything immediately because we have other priorities.”
The fact that the legal and house buying system in Scotland is different would cause the society a few administration problem as it only has 20 staff.
Further inefficiencies could result from currency and other factors post-referendum but Fazal makes the point that these would not be insurmountable problems.
“If I was running a much larger building society from my present location I would be eyeing up the Scottish market and thinking about what would be very best way of doing this even if it was independent,” he says.
Dunfermline-based mortgage brokerage Mortgage Help Scotland is unusual in reporting that new borrowers and those undertaking remortgages are starting to ask what the implications of a yes vote could be. But Mortgage Help Scotland’s director Steve McAvoy emphasises that the issue is not putting them off and he feels mortgages would be one of the industries least adversely affected initially by Scottish independence.
“Because most lending we are doing is coming from England, we are seeing it as business as usual as borrowers will already have a home in sterling currency and the fear factor shouldn’t be an issue in run-up to the poll for the same reason,” says McAvoy. “Although in theory lenders could withdraw loan offers because of the independence issue it is most unlikely to happen as it would cause a stink.
“If we keep shadowing sterling it will be fine and this the most likely scenario but if we did change currency it could have implications for new mortgages, which would be foreign currency mortgages. It’s hard to see whether people in England with a mortgage with a Scottish bank like Clydesdale would be better or worse off. If Clydesdale made them worse off, it would just lose customers because, with mortgages, people vote with their feet and switch if they see a better deal, so I therefore couldn’t see it happening.”
Over-confidence on currency union
The Fiscal Commission Working Group has put together a macroeconomic framework for an independent Scotland and it concluded that it is in the best interests of Scotland and the UK to continue to retain sterling in a formal monetary union.
However, Thomas argues that despite what the Scottish National Party says, it seems clear that the UK will not agree to a currency union when push comes to shove.
It is interesting that most commentators do not even give a moment’s consideration to the Scottish government’s insistence that it will be able to continue to enjoy a currency union with the UK. So perhaps it’s time it stopped being in denial about this?
“SNP leader Alex Salmond has said that if we don’t allow an independent Scotland a currency union it won’t accept its share of the debt on the grounds that if Scotland can’t share the assets it can’t share the liabilities,” says Thomas. “But the British government has said it’s not an issue of sharing assets, it’s an issue of sharing the mechanism of a currency and I believe it is correct in that.
“I’ve heard it quoted that if Salmond loses the referendum vote, it would be terrible for him and that if he wins it he will be a hero. But I think it’s quite the opposite because if he loses it probably won’t be held against him and people will feel he tried his best. But if he wins, he must deliver on his assertions and what he has said is fundamentally misleading.”
Clearly there are many grey areas in the run-up to the referendum with regards to what the consequences of a yes vote could potentially have on mortgage lending.
But with the majority of lenders unwilling to engage in a debate about the issue, it’s hard to weigh up what the actual ramifications of a yes vote would be.
While their reticence is perhaps understandable, it leads to an obvious question – how can the Scottish people be expected to make an informed decision on their economic future if leading financial services organisations are not prepared to shed any light on the subject?
COMMENT: JOHN SWINNEY, SCOTTISH FINANCE SECRETARY
Independence is an opportunity for us to build an economy that takes advantage of our unique strengths and size and puts our wealth to use in Scotland’s best interests. Based on GDP per person, Scotland would be the 14th wealthiest country in the OECD, ahead of France, Japan and the United Kingdom. Such a strong economy can only be good for the mortgage industry and good for the mortgage market.
Scotland has expertise in the financial services industry and we will be able to build on that. Mortgages in Scotland already operate under Scottish law and through a different system to the rest of the UK.
With the powers we already have in Scotland, we have flexibility over housing budgets, investment and innovative financing. We are able to support home buyers through MI New Home and Help to Buy Scotland and we are able to use our capital budgets to support house builders. From 2015, Scotland will be responsible for setting a replacement tax for stamp duty and we have made clear we will replace the outdated and unfair slab system with a progressive system that will help people get on the housing ladder.
With the powers of independence, we will be able to do more to support Scotland’s market. We will have full control and be able to tailor our grants, loans, equity stakes and guarantees to meet the needs of our homeowners, the house-building sector and mortgage providers in Scotland.
The Fiscal Commission Working Group, comprising eminent economists, including two Nobel Laureates, has helped to shape the development of a robust fiscal and macroeconomic framework for an independent Scotland. Furthermore, it has concluded that it’s in the best interests of Scotland and the UK to continue to retain sterling in a formal monetary union. This approach makes sense for Scotland as it will make it easier for us to trade with the UK and also ensures our mortgages continue to be in pounds and pence. Mortgage rates will continue to be based on the interest rate set by the Bank of England, which in a sterling area will be exactly the same for Scotland as for the rest of the UK.
Importantly, future Scottish governments would be able to improve the competitiveness of Scotland as an attractive location for investment and expansion. A more vibrant and dynamic economy will increase the opportunities for companies operating in Scotland and the mortgage industry will be able to build on its strengths and opportunities across sterling area and international markets.
With independence, Scotland will have control over new economic levers that can be used to deliver economic growth, resilience, fairness, opportunity and sustainability in the mortgage industry.