A promising new mortgage product

By Staff Writer Ruth Jackson Jul 04, 2011

Ruth Jackson

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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.

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Published in Mortgages | More articles by Ruth Jackson

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  • 1. benny carter

    (05 July 2011, 10:10AM)  Complain about this comment

    You haven't dealt with the scenario where house prices fall over the term...

  • 2. ontheotherhand

    (05 July 2011, 11:09AM)  Complain about this comment

    What if house prices remain flat in real terms which means they only keep track with inflation? Look at the situation today and see inflation of 5% and stagnant wages. If the BofE manages to make that situation persist by pretending inflation is 'temporary' and 'external', Castle Trust gets a nice inflation proof return, but the homeowner's inflation adjusted wealth/deposit gets eroded.

  • 3. alex

    (05 July 2011, 11:18AM)  Complain about this comment

    In the small print are there any clauses that allow Castle to require an early repayment of the loan, or indeed any creditors should Castle go under? I wouln't fancy being told all of a sudden that I had to repay the £40,000 even if I didn't want to sell my house.

    If I default on the mortgage what is the order in which the vultures feed? Does the bank get first dibs at any forced sale proceeds, leaving Castle to pursue me for any shortfall/ repay there loan? Are lenders happy with this strucutre? I always thought that taking out a seperate secured loan on your house other than your mortgage providers one was very muxh a no no.

    Final thought, I just don't like the idea......if you can't afford the deposit then the house is beyond your means, either lower your sights or raise your earnings, but for gods sake don't just 'borrow' the difference. You're kidding yourself as well as the bank.

  • 4. Dean

    (05 July 2011, 12:26PM)  Complain about this comment

    Isn't this just a different form of leverage that will tempt people in and then just recycle their savings?

    JC Flowers is a money making machine - they are not doing it for any other reason than to make money. So I would say this is toxic at best and I will not be makign an application.

    If it's too good to be true...

    Why is it these days that everyone is so desperate for the housign market to go up? Bring back the 1990's and the subsequent correction in asset values... it's just gone on for too long...

    The wait goes on... over-leverage, additional borrowing, bank of mum and dad, buy with friends, loans from private equity firms... just please don't let these assets fall in value...

    One guy wrote the housing market is a ponzi scheme... and I for one agree with him - the more I loook at it the more and more the similarities are undeniable.

    The wait goes on...

  • 5. julian

    (05 July 2011, 12:54PM)  Complain about this comment

    This is just a lazy 'cut and paste' of Castle Trust's propoganda. I expect better from Moneyweek. None of the right questions have been asked by the journalist.

  • 6. Nick

    (05 July 2011, 05:09PM)  Complain about this comment

    Isn't this illegal to present money as a deposit that has been borrowed?
    Aren't deposits supposed to be actual owned cash by the borrower?

  • 7. Numpty

    (05 July 2011, 06:46PM)  Complain about this comment

    This product is only suitable for "grown ups" who fully undertsand the joys and risks that go with taking on a levereged position. As I beleive the market will at the very best only creep up a little in the medium term I think this is a product worth considering

  • 8. ben711

    (06 July 2011, 12:35AM)  Complain about this comment

    This to me seems like an incredible offer, I don't see house prices rising with inflation so the cost of part of my debt is decreasing . It is already more prudent now to buy than rent and this will further increase my purchasing power. Rather than buying a larger property I am able to use the now spare cash to invest in a high yielding asset such as solar which is inflation linked ... a simple hedge ..

  • 9. alex

    (06 July 2011, 08:39AM)  Complain about this comment

    ben711.......so in effect you will be using borrowed money to buy shares in solar energy companies. I'd rather you than me.

  • 10. Fingerbob69

    (06 July 2011, 10:11AM)  Complain about this comment

    For a moment I thought they were lending the borrower the deposit sum. They ain't. Their 20% has to be matched by the borrower with 20%.

    Which really begs the question: what's the point?

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