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Is Castle Trust shared equity deal too good to be true?

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.

 

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  • Ian 16th September 2011 at 9:52 pm

    Dear Castle Trust,

    is it possible to remortgage an existing property to partnership mortgage.

    If an existing owner already has 20% equity in their property it should reduce their monthly payments.

    Also would it be possible to remortgage an existing buy to let portfolio?

  • Gavin, London 22nd June 2011 at 6:51 pm

    As a first time buyer I will stay away from such scam schemes. They are only designed to prop up house prices artificially high and make profits for the company and the builders.

    First time buyers save a deposit like the rest of us. House prices are falling and set to continue falling till they reach historic and normal levels. This scheme will just trap you in debt.

  • Chuck 22nd June 2011 at 4:49 pm

    When products like this come out, it is obvious that it is only house price falls that are needed. The young people are not buying cars, they are paying of their education debts.

    P.S. if there is so much money to buy houses, why does the whole western world appear to be broke?

  • Castle Trust 21st June 2011 at 5:57 pm

    Hello,

    We made a little mistake in our post above with our web address. Would it be possible to correct this to http://www.castletrust.co.uk/blog

    Many thanks.

  • Kevin Vella 21st June 2011 at 5:15 pm

    I think it is refreshing to see a product truly different from anything on offer in today’s challenging marketplace. I agree with other comments that success will be linked with simplifying the complexities.

  • Richard Rouse 21st June 2011 at 12:13 pm

    If another lender came up with an idea as complex as this for typical retail customers, chances are the FSA would be all over them.

    So why isn’t this happening here, I wonder?

  • Mortgageboy 20th June 2011 at 7:16 pm

    Impossible to re-mortgage these type of schemes,clients struggle to understand Northern Rock Together so this will baffle them. Young buyers need to stop buying flash cars and save up to buy a house.

  • Castle Trust 20th June 2011 at 6:48 pm

    Hello Tessa and thanks for your interest. Obviously, we don’t think our proposed mortgage product is too good to be true and perhaps you’d expect us to say that – but allow us also to clarify some of the concerns you raise.

    Firstly, if the Partnership Mortgage is repaid on sale of the home or at the end of the mortgage term (up to 25 years, depending on the age of the homeowner) there is no accrued interest on the Partnership Mortgage  – we thought we had been clear about that in our marketing materials (please take a look at the Partnership Mortgage brochure which you can download at http://www.castletrust.co.uk/mortgages–2/how-does-it-work) but we will, of course, take your comments on board if there is any ambiguity. Secondly, the Partnership Mortgage will reduce the size of the traditional interest-paying loan (a reduction of an 80% LTV to a 60% LTV is a 25% reduction on the amount on which interest is being paid) and the interest rate on that loan, which is why we have said it can reduce monthly payments by a third. In return (and as you’ve pointed out) the homeowner shares 40% of the growth in the property value with Castle Trust when they sell their home or at the end of the term of the loan (up to 25 years). The reason that the homeowner shares more than 20% is precisely because they are not paying interest on the Partnership Mortgage during the life of the loan, nor are they paying rent for the 20% of the home that Castle Trust funded.

    The details of the Partnership Mortgage are very different from the Shared Appreciation Mortgage (“SAMs”) which Mr Haresnape is referring to in another comment on this post – both product design and target customer base.  Whereas SAMs were targeted at vulnerable, elderly borrowers, Partnership Mortgages are only suitable for those who already have a 20% deposit with a good credit history and provide homeowners with a lifestyle choice (improving current affordability in return for sharing potential future profits) and a way to reduce risk (sharing the loss if the home falls in value and/or diversifying assets away from a single property).  It is NOT designed to prey upon the vulnerable who have limited options.  Partnership Mortgages are also a much fairer product.  In return for 20%, we share 40% of any growth (leaving the homeowner with the majority of growth) and we will bear 20% of any loss.  SAMs lent homeowners 25% and took 75% of growth (leaving the homeowner with the minority of growth), and SAMs didn’t share any loss.

    We hope this helps clarify our proposal but please feel free to raise any other concerns you have here (or at our own blog at http://www.castletrust.com/blog). Many thanks again.

  • Charles Haresnape 20th June 2011 at 5:12 pm

    Does this sound a bit like the old Shared Appreciation. If so probably will not sell. Complicated to explain and clients will not be keen to give up appreciating value when it comes to it. Could be wrong tho!