New 20% top-up mortgage could suit half of all buyers, says Castle Trust

There is no launch date for the new Partnership Mortgage being offered by Castle Trust, which promises to revolutionise the house-buying market.

Martyn Guerin, chief operating officer, would not commit himself to saying whether the launch would be this year. It would not necessarily immediately follow getting the required permissions from the FSA and OFT.

He said: “We will launch when we are ready  – when we are sure we have got the product right and not before. We need to get things right, because we will be in the market for a long time.”

In an interview with Estate Agent Today, Guerin admitted that there have been a number of misconceptions about the offering, which will be a 20% ‘top-up’ mortgage available only to home buyers who already have a 20% deposit.

He said it was not the case, as has been reported, that borrowers also needed to be investors in the other side of the Castle Trust offering, House Price Savings Accounts (HouSAs). He also accepted that the new mortgage will not help first-time buyers on to the housing ladder, unless they already have a 20% deposit.

He said that closer attention would be paid to communicating the  offerings from Castle Trust, which is chaired by the former FSA chairman Sir Callum McCarthy. He said: “I think sometimes you can just get too close to something, but certainly we need to be more careful in future as to how we phrase things.”

He said that on the HouSA side of the business, investors could invest for three, five or ten-year terms, at rates of between 2% and 3%, based on the Halifax House Price Survey. They will be able to choose to cash in on exit, or take a quarterly ‘voucher’, whose value would be linked to the Halifax, or could invest in both strategies.

Minimum investment would be £1,000, he confirmed. He emphasised: “This is not a capital guarantee product, but whatever the index does, the investor will outperform the Halifax.”

For example, an investor puts in £10,000 and the Halifax index stands at 100. By year five, the index stands at 150 and the value of the HouSA has gone up to £17,500. Much more complicated is what happens if the index slips, but the borrower appears to be shielded from the entire slippage.

Partnership Mortgages will allow a borrower to take out a 60% mortgage with one lender, and then a 20% second charge from Castle Trust. On this 20% mortgage, the borrower would pay no interest. In return, on the sale of the property, or at the end of the mortgage term (to be 10–25 years), the borrower would hand back the original 20% stake plus 40% of any uplift in the property’s value.

If the property were to fall in price, the borrower would hand back the original 20% stake, but Castle Trust would contribute 20% of the loss in value.

Thus, a £200,000 house purchase could be funded with a 25% deposit (£50,000), a 20% Partnership Mortgage (£40,000); and a 55% traditional primary mortgage (£110,000). It is sold five years later.

If the house rises in value by 10% to £220,000, then the Partnership Mortgage is repaid for £48,000 (initial £40,000 plus 40% of £20,000).

If the house falls in value by 10% to £180,000 then the Partnership Mortgage is repaid for £36,000 (initial £40,000 less 20% of £20,000).

So, what do people think of the idea? “We have done regular market research, and words such as innovative, exciting, new and accessible are words that come back to us,” said Guerin. “People also view the HousSAs as offering a good alternative investment vehicle.”

Does the word ‘complicated’ ever also come back? “Well, we do take on board all the feedback we get,” he said.

“Our market research also shows that the Partnership Mortgage would be attractive to about half of home-buyers – for example, people who want to reduce their monthly mortgage payments because they want to put their children through private education, or go on regular holidays. And also to people who do not want to move twice, because a Partnership Mortgage will allow them to buy the type of property they eventually aspire to.”

Does he not think it risky, though, that people having to sell up because of one of the four Ds (death, divorce, debt and downsizing) could find themselves having to hand over large sums of money at a time when they might not be in the best financial health?

“The Partnership Mortgage won’t be for everyone, and we have certainly given a lot of thought as to the outcomes you mention,” Guerin said.

“We will also make people think about how they would fund the repayments if, for example, they had not sold the property.”

Guerin also emphasised that the Partnership Mortgage will not be available directly, but only through advisers.

“This will be an advised sale,” he said. “There will be no direct route, but for advisers it will allow them to consider the possibility that clients might take out one 80% LTV mortgage, or a 60% one with a 20% Partnership Mortgage on top.”

Guerin also made it plain that whilst the major investor is JC Flowers, the US equity firm that bankrolled the Kent Reliance Building Society and is looking for other deals with building societies, there will be no special relationship with, for example, Kent.

“There will be no formal relationship, but obviously, we would welcome the opportunity to work with them,” he said.

And how is the permissions process going? FSA approval is needed for the investment side of the business, while the OFT must approve the Partnership product because it is a second charge.

Guerin gives nothing away but says: “We have had good levels of engagement with the parties.”