Newspaper article The Evening Standard (London, England)

New Property Play May Open Doors

Newspaper article The Evening Standard (London, England)

New Property Play May Open Doors

Article excerpt

Byline: Anthony Hilton

THE City prides itself on its innovation, but it seems to take an awfully long time to get anything done. It is five years since the banking crisis began and still we are struggling to find alternative sources of funds to complement or replace the disabled banks. The pension funds are moving painfully slowly towards infrastructure investment. Bond issues by mid-sized companies in either the private placement market or the retail bond market are only now beginning to happen with any frequency. New internet-based lending institutions such as Aldermore, Funding Circle and Zopa are using technology to revolutionise the way lenders and borrowers are brought together, but remain small in the overall scheme of things.

But the prize for creativity and innovation this week undoubtedly goes to Castle Trust, with a totally new approach to the housing market. On the one hand, it has created investment funds that will track the Halifax house price index. On the other, it will use these monies raised from investors to offer a new form of mortgage finance whereby it will fund 20% of the cost of a house in return for a share of the profits (or indeed or a portion of the losses) when the house is sold.

In return for its 20%, Castle will take 40% of the profit (or shoulder 20% of the loss) when the house is sold or its money repaid, but will not charge interest in the meantime. This makes for a significant reduction -- about a third -- in monthly outgoings compared to a conventional mortgage. It also means that if house prices rise slowly -- at less than 3.5% a year in the examples used in the publicity material -- then the buyers will save more in interest than they will give up eventually in shared profits.

Homebuyers might instinctively shy away from sharing the profit but it is potentially a very fair deal. The buyer provides a 20% deposit and Castle Trust provides a further 20%, meaning there is only 60% of the finance still to be provided by a conventional bank or building society lender.

Not only are the latter going to be more willing to lend 60% than 80% because it is much less risky for them, but the price ought to be a bit lower so there is a further saving for the home buyer there. The lenders' money will go further too, as each mortgage will be 20% smaller than it would otherwise have been, meaning they will be able to lend to more people.

There have, of course, been shared appreciation mortgages in the past. However, they got a bad press because the providers were greedy, taking 75% of the profits. This meant that as the house rose in value, the loan-to-value rate rose even faster. This made it very difficult to get out of the deal by remortgaging -- the more so because many of the customers were elderly and with limited incomes. …

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