Brian Murphy, lending manager, Mortgage Advice Bureau
The introduction of Advantage\'s Flexishare product could be a ground-breaking development. Although a number of lenders have redefined their affordability models in recent months, increasing the levels they are prepared to advance, most high street brands will not lend above 5 x income. Some sub-prime lenders have also adopted affordability models and several of these offer higher levels of potential borrowing than mainstream brands, having moved up to levels of 5.5 x income and beyond. Flexishare is designed to provide a solution for clients who have been unable to borrow sufficient funds from mainstream brands, but it does this responsibly by using a debt to income ratio calculator. It effectively offers a proportion of borrowing at a subsidised rate compared with that which can be obtained in the wider market. This allows a typical client to borrow more than 6 x income, assuming a minimum 5% deposit. With the average male income for full-time employees in 2004/05 being 25,100, according to the Office for National Statistics, and the average UK house price in the region of 176,000, according to the Halifax House Price Index, it is clear that a first-time buyer with a 5% (9,000) deposit will still require borrowing of 167,200. To a client earning this typical income Flexishare will advance 152,879 over 25 years, 160,246 over 30 years and 165,300 over 35 years assuming no existing commitments. These borrowing levels equate to 6.09 x, 6.38 x and 6.94 x income. This level of borrowing potential allows more would-be home owners to buy. The product also offers a fixed rate on an interest-only basis for the life of the loan at 2.99% for the element referred to as the residential ownership loan. The lender effectively provides this subsidy in return for a share of equity appreciation. If our client was to purchase the average property today on the basis of taking the minimum 15% of purchase price on the ROL, they would be borrowing 140,800 on either the two or three-year conventional stepped fixed rate mortgage and 26,400 on the ROL with a 5% deposit. Assuming house prices continue to rise at a modest 3% annually over the next five years, the property would have appreciated to 204,031. In the event of the property being sold at this time, Flexishare would be entitled to 15% of the equity appreciation – which in this case would equate to 4,204. Should the buyer have carried out improvements to the property such as a loft extension adding 15,000 to the value, Advantage does not share in this element of equity appreciation. It is also important to note that in the event of the property falling in value the lender shares the downside. In a market where prices are continuing to rise and many first-time buyers are unable to borrow sufficient funds from mainstream lenders to get on the property ladder, this product could allow many more would-be home owners to realise their aspirations of ownership in exchange for giving up a small element of future equity appreciation.