Good news for the 1.5 million people who, even though they’ve built up 20 per cent deposits, have not been able to buy because of the banks’ reluctance to lend.
An innovative new mortgage product is designed to make it easier for ordinary homebuyers to get access to the funds they need, by making it more attractive for banks to lend to them.
Castle Trust’s partnership mortgage is available to buyers aged up to 55 with a good credit record, who are seeking to buy a property that is at least two years old. They must have at least a 20 per cent deposit and be able to get an ordinary repayment mortgage of up to 60 per cent from a bank or building society. This makes up 80 per cent of the property’s value. The final 20 per cent comes from a new partnership mortgage, which is special because it involves no monthly outgoings and no added interest…
And there will be no monthly outgoing on that 20 per cent - no interest payment and no capital repayment for the whole of the mortgage term (up to 25 years). Instead, when you sell up, or at the end of the mortgage term, you’ll repay the original loan plus 40 per cent of any increase in the property value during that time.
So if the price of your home has not changed, you’ve effectively had an interest-free loan on 20 per cent of its value. If the price has fallen, Castle Trust will still expect the loan to be repaid but will shoulder 20 per cent of the losses (on purchases only, not remortgages).
For would-be buyers there are several potential benefits. Firstly, lenders are much keener on customers who only need 60 per cent loan-to-value (LTV) mortgages, because there is very little risk that they will be stuck with a property worth less than the amount they lent on it. So it should be easier to get a repayment mortgage.
Secondly, it’s likely a 60 per cent LTV mortgage will be at a lower interest rate than one at 80 per cent LTV, so your monthly outgoings should be substantially reduced. Ray Boulger, mortgage specialist at broker John Charcol, calculates that monthly payments will be around 30 per cent lower on a 25-year, 60 per cent LTV repayment mortgage - alongside a 20 per cent Partnership Mortgage - than they would be on a standard 80 per cent LTV repayment mortgage.
Additionally, the 20 per cent Partnership Mortgage means borrowers are less exposed to the risk of rising interest rates that could blow their monthly budget.
The risk is that you could end up paying more overall if property prices rocket. Basically, says Andrew Hagger of moneycomms.co.uk: “There is a trade-off between lower monthly outgoings for as long as you are borrowing and losing 40 per cent of the increase in the value of your home.”
Provided your home value rises by less than around three per cent a year, the Partnership option is likely to work out cheaper than the traditional equivalent. But Hagger gives the example of a home that increases from £200,000 to £300,000 over a ten-year mortgage term – an annual increase of 4.1 per cent. In that scenario you could find yourself £20,000 worse off.
Partnership Mortgages are therefore unlikely to work well for areas such as central London, where prices are particularly robust. Nor are they suitable if you’re uncomfortable with such uncertainty as to what your loan will cost you. But for those who live where house prices tend not to be volatile and want to cut monthly outgoings, they could be a useful option.
Importantly, Castle Trust is putting a lot of emphasis on the importance of borrowers understanding the potential risks, and its mortgages are only available through approved, qualified mortgage advisers.