by Mark Johnston
Castle Trust, a new type of financial institution.
The Castle Trust financial institution plans to unlock the UK housing market for both investors seeking house price returns and home buyers seeking to reduce their monthly payments, or wanting a safer way to buy their home.
Castle trust has significant financial backing from one of the largest institutional investors in the world specialising in the financial service sector.
The castle Trust has been waiting for Financial Service Authority (FSA) approval, they have now stated that the final authorisation for the firm depends on securing £50 million in capital funding from private equity firm JC Flowers.
With the mortgage market still firmly stuck in the doldrums, you would think that any innovation from lenders would be welcomed with open arms.
However the recent announcement that new lender Castle Trust is planning to launch ‘partnership mortgages’ has thrown as many questions as answers.
The ‘partnership mortgage’ is a shared equity product. It will offer borrowers under the age of 55 with a 20 per cent deposit an additional 20 per cent charge loan with no monthly repayments.
This will make the borrower eligible for a 60 per cent loan to value (LTV) repayment mortgage from another lender, which is likely to be cheaper than an 80 per cent loan to value (LTV) product.
When the property is sold or the mortgage term ends, the borrower repays the 20 per cent advance plus 40 per cent of any increase in the property’s value. However, if the property loses value Castle Trust will pay borrowers 20 per cent of the loss.
To help fund the partnership mortgage Castle Trust will also launch a number of investment products that are linked to house prices.
Mikkel Bates, head of marketing at Castle Trust, says “we regard our product as complementary to the government shared equity schemes out there because they cover either those who can not raise a large deposit or those who want to buy a new property”.
Professor Susan Smith, a housing academic atCambridgeUniversity, stated “if ideas like this were to become broader and more mainstream I think it would completely change the way we think about the housing system and in particular I think we would stop thinking about the stark divide between owning and renting”.
However, some financial experts feel that this particular product is more like a part rent, part buy product than a way to increase long term property ownership.
Other experts believe that the main lender may be concerned that the deposit is borrowed and presumably subject to a second charge.
Although, former Monetary Committee member, Kate Barker has suggested that “second charge equity loans that force borrowers to share house price appreciation with their lenders could dampen home owners appetite for house price inflation and lessen the need for loan to value caps”.
Therefore barker added that “Castle Trust could potentially drive house price stability”.
Castle Trust chief executive, Sean Olfield, states “this really will be a momentous event in the residential property market because we will be offering investments and mortgages the like of which have simply not been available until now. Castle Trust will be a shot in the arm for theUKhousing economy”.
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