Two new mortgage schemes that aim to help homebuyers buy a property have been announced this week - but mortgage brokers have warned that it is crucial borrowers understand the risks involved when opting for one of these deals.
On Monday, a new company called Castle Trust, backed by American private equity firm JC Flowers and chaired by the former chairman of the Financial Services Authority (FSA) Sir Callum McCarthy, announced plans to offer shared appreciation mortgages from September this year, once it has gained FSA authorisation.
Castle Trust’s Partnership Mortgage scheme will provide borrowers with an interest-free equity loan of 20 per cent, with borrowers putting down a 20 per cent deposit and borrowing the remaining 60 per cent of the property value from a lender.
While there is no interest payable during the term of the 20 per cent loan - which can be up to 25 years - Castle Trust will take 40 per cent of any gain in the property’s value when the owner sells it, as well as the repayment of the original loan.
Castle Trust says the scheme will be an attractive option for borrowers that want to reduce their monthly mortgage payments, those who want to buy a larger home without increasingly monthly payments or those who want to release equity in their home.
However, mortgage brokers say the scheme will bring back memories of the shared appreciation mortgages (SAMs) that were offered by Barclays and Bank of Scotland in the late 1990s. Borrowers were offered an interest-free equity loan of 25 per cent for 75 per cent of the gain in the property’s value.
Many borrowers that took up this deal were caught out by the rapid appreciation in house prices over the following decade, which meant that homeowners had to repay most of the profit on their property’s sale.
“Shared appreciation mortgages have come in for criticism in the past because the homeowner had to give away too much of the value of their home when they sell, leaving little cash left with which to buy another property,” says Melanie Bien of Private Finance, the mortgage broker.
Castle Trust says its deal is different to previous schemes as it will take no more than 40 per cent of the property’s gain in value, plus repayment of the original 20 per cent stake. It will also share in any fall in the property’s value to the tune of 20 per cent.
Mortgage brokers say that borrowers need to understand the risks involved with any shared appreciation mortgage scheme. Ray Boulger of John Charcol says it is important that borrowers seek independent financial advice when considering the Castle Trust scheme.
“There will be situations where this could be a good deal but it could also work out more expensive, depending on different house price scenarios,” he explains.
For example, the Castle Trust scheme will work in borrowers’ favour if house prices go up slowly or if they fall slightly. But if prices rise rapidly, the scheme would be very expensive and cost more than a traditional mortgage.
David Hollingworth of London & Country says borrowers should not see the scheme as a cheap option. Lenders’ attitude to the shared equity element will be important to its level of appeal - Castle Trust is currently in talks with a number of the major lenders.
This week also saw the launch of another shared appreciation mortgage scheme in the form of the government’s FirstBuy scheme, a rebadged version of the shelved HomeBuy Direct programme, which aims to help first-time buyers - those with a maximum income of £60,000 - onto the property ladder.
Under FirstBuy, the government and participating developers will provide a 20 per cent equity loan, interest-free for the first five years, with the borrower paying a 5 per cent deposit, to buy a new-build home provided by one of the 100 developers that have signed up for the scheme.
Loans are repaid when the property is sold, with the government and developer taking a 20 per cent portion of any gain in the value of the property.
However, while the FirstBuy scheme will be more attractive to first-time buyers than Castle Trust’s scheme due to the small deposit required, property experts point out that buying a new-build property can be riskier as the real value of new homes is less transparent.
Most new-build properties have a premium price tag of around 5 per cent because they have not been lived in before - however, when house prices are falling this could put many borrowers, who have only put down a 5 per cent deposit, into negative equity.
Borrowers interested in the FirstBuy scheme are being advised to register their interest now, as the scheme only has funding to help 10,000 homebuyers. Homes will be available to buy from September, according to the government. For more information visit www.homebuy.co.uk.