A new proposition was unveiled this week by Castle Trust, a firm that hopes to bring a new type of mortgage to the market and investments that are linked to house price movement.
The new ‘mortgage’ will be for 20% of the property value and will not charge any interest or require any monthly repayments. Instead the borrower must pay back the loan when the property is sold, along with 40% of any growth in the property value.
Take an example of someone buying a property for £100,000 using one of Castle Trust’s new ‘Partnership mortgages’ of £20,000. If the property was sold a few years later for £130,000 the total amount due to Castle Trust would be the original £20,000 equity loan plus £12,000 as the share of the growth in value, giving a grand total of £32,000.
If the property was sold for £90,000 then Castle Trust will share in the loss and £18,000 would be repayable. Importantly, this share in any loss would not apply on a remortgage, sale within 12 months or an early buy out of the equity loan.
Equity loans are not an entirely new idea and have been a cornerstone of many of the Government’s first time buyer initiatives, such as the new Firstbuy deal. However, aside from asking the borrower to forgo a higher proportion of any growth, this new scheme requires the borrower to put down a 20% deposit of their own so it is unlikely to solve the problems of many first time buyers or others struggling to get a decent deposit.
The product can reduce a borrower’s outgoings, but could prove more expensive in the long run than a purchase funded solely by a traditional mortgage, depending on what happens to the property value. Castle Trust has yet to receive regulatory approval so we’ll have to see how the detail pans out and in particular how lenders will approach Partnership mortgages.
One of the potentially appealing features of this scheme is that the traditional mortgage borrowing is cut from 80% of the property value to 60%, which could lead to a better mortgage rate deal for the borrower. However some lenders have not offered their keenest, core rates to those using shared equity, preferring to offer specific deals (at slightly higher rates) for this type of scenario.
The Partnership Mortgage does bring innovation and opens up shared equity to a wider market but it won’t suit everyone and borrowers will certainly need to go in with their eyes wide open.