With the housing market in the doldrums and mortgage lending languishing too, news of a new mortgage product was always going to cause excitement. So it was last week when the newly launched Castle Trust said that from September it would offer a new Partnership Mortgage. But what exactly is the deal and is it worthy of the attention it is getting?
Castle Trust has a respectable pedigree. It is backed by US private-equity firm JC Flowers and chaired by Sir Callum McCarthy, former chairman of the Financial Services Authority (FSA). At first glance, its product looks fine. Castle Trust lends you up to 20% of the value of the house you intend to buy. This lets you boost the deposit you can offer your lender and so bring down the loan-to-value ratio (LTV) of the mortgage. This will allow those who wouldn’t normally be able to get a mortgage on traditional terms into the market, and others to get a lower rate than they would otherwise.
For example, if you wanted to buy a £400,000 home, Castle might lend you £80,000 on the understanding that you’d add £80,000 to that and then get a mortgage to cover the other £240,000. The Castle loan will be interest-free for 25 years with no repayments due. But when you sell the house you have to give them 40% of any gain plus the original loan. In some sense this is a great deal: go with Castle and you get a much lower rate on your mortgage than you might have. However, you could get hit when it comes to selling up.
A similar product, the shared appreciation mortgage, was available in the late 1990s. Borrowers were stung when the property boom left them having to hand over large sums to lenders when they sold. Take the £400,000 house in the example. If you want to sell in five years, and the price of the house is up 20% (to £480,000), you will have to hand back the £80,000 loan, plus £32,000 (40% of the gain). That’s not bad – you still have £48,000 for yourself – but it also means you’ve paid Castle an interest rate of not far off 8% a year for its loan.
On the other hand, if prices are flattish and your house has gained just 2% over the five years, it looks a better deal. You repay £3,200 for your £80,000 loan, an equivalent rate of more like 0.8%. Better still, if prices fall, Castle will suffer with you and take a cut of the losses by reducing your loan by a percentage of the loss: so your real interest rate will be negative. There are still details to be ironed out – most importantly what type of mortgage you will be able to get, as many lenders say they won’t offer their core deals to someone who has borrowed part of their deposit. But it’s one to keep your eye on.