With the mortgage market still firmly stuck in the doldrums, you would think that any innovation from lenders would be welcomed with open arms.
But the announcement that new lender Castle Trust is planning to launch ‘partnership mortgages’ later this year has thrown up as many questions as answers.
Castle Trust describes itself as a mortgage and investment firm and says once authorised by the Financial Services Authority it will offer consumers “a new type of mortgage linked to the value of your home”.
“A partnership mortgage is a mortgage for 20% of the value of your home, on which there are no monthly payments,” the firm says on its website.
“If you satisfy our lending conditions, we will partner with you in the purchase of your home and share with you in any rise or fall in the value of your home when you sell it, or at the end of the mortgage term.”
Put simply, borrowers who already have a 20% deposit can obtain a further 20% deposit from Castle Trust to access a 60% LTV mortgage from another lender.
The borrower makes no monthly payments on the 20% advanced by Castle Trust, but when they come to sell the property they give the firm 40% of any increase in the property’s value.
And if the borrower sells their home at a loss, Castle Trust will share 20% of that loss.
At first glance this seems like a great way for borrowers with a limited deposit to access better rates, but as always, the devil is in the detail.
As well as losing out on 40% of any increase in the value of their property, it is also assumed that the borrower will need to pay back the 20% advance to Castle Trust, but this is unclear and the firm does not specify whether interest will be accrued on the loan.
Furthermore, the borrower will not be able to access the standard rate of a 60% LTV mortgage – they will need to pay more as the mortgage effectively comes with a second charge loan, meaning any lenders willing to partner with Castle Trust will need to create a separate range of products.
So although consumers will still be able to access better rates than if they only had a 20% deposit, Castle Trust could fall short of its claims on its website that a partnership mortgage will allow a borrower to save around one third of the monthly cost of buying a home, or buy a home up to 25% more valuable for the same monthly payments.
No doubt these ambiguities will be ironed out in due course, as the firm is still waiting to receive FSA approval, which it is hoping to obtain by Q4 2011.
And on a positive note it is said to be keen to distribute via brokers, but whether a significant number of lenders will be willing to create separate products and lend on this basis remains to be seen.