The FSA looks set to give Castle Trust the green light to conduct investment activities, which will see it offer a shared equity mortgage product through brokers.
Castle Trust says the FSA has informed it that it is minded to authorise its investment arm Castle Trust Capital Management and mortgage arm Castle Trust Capital to conduct investment business, pending confirmation of £50m in capital funding from private equity firm JC Flowers.
JC Flowers has previously provided Castle Trust with £15m in funding since it completed its FSA application in June 2011.
Castle Trust Capital, which has been licenced by the Office of Fair Trading to conduct second charge mortgage activities since October, plans to launch a shared equity product, partnership mortgages. It will allow borrowers under the age of 55 who have a 20 per cent deposit to take out a 20 per cent loan from Castle Trust. This will make them eligible for a 60 per cent loan-to-value repayment mortgage from another lender, which is likely to be cheaper than an 80 per cent LTV product.
Borrowers do not pay interest on the loan from Castle Trust during the mortgage term but when the property is sold, the borrower must repay the loan in full. If the property increases in value, the borrower must pay 40 per cent of the increase to Castle Trust and if the property decreases in value, Castle Trust will pay 20 per cent of the loss.
Castle Trust says it will launch a number of investment products to help fund partnership mortgages.
The product will only be available through independent intermediaries who have passed Castle Trust’s professional development accreditation from the Chartered Insurance Institute.
Castle Trust head of marketing Mikkel Bates says: “We regard our product as complementary to the Government shared equity schemes out there because they cover either those who cannot raise a large deposit or those who want to buy a new property.”
The Government’s FirstBuy scheme works as a shared equity partnership but it applies only to new-build homes and is only interest-free for the first five years.
Bates says the Castle Trust offering will only apply to homes that are at least two years old. He says: “New-build properties are often seen as having a new-build premium so because we are not charging any interest on the loans but are sharing in the profit or loss that the buyer makes on the home, then we cannot afford a markdown over the first couple of years.”
John Charcol says it will be pursuing accreditation over the course of the third quarter in time for the launch, which is rumoured to be towards the end of the year. Senior technical director Ray Boulger says a weak forecast for house prices, along with falling fixed rates, will emphasise the scheme’s attractiveness to potential borrowers.
He says: “Lenders are adjusting their fixed-rate pricing to reflect the funding for lending scheme and the fact that swap rates have come down quite sharply and I think we will see further falls in fixed rates over the next few weeks across the board. The key point is that if you can borrow money at 60 per cent LTV cheaper than at 80 per cent, then as well as getting the benefit in terms of paying no interest on 20 per cent of your loan, you are getting an extra benefit of paying a lower rate of interest on the 60 per cent you have borrowed.
“It clearly works best for people who need to borrow between 70 and 80 per cent LTV. For people who only need to borrow 60 per cent or less in total, it is less attractive as they will be able to get that cheaper loan at about the same rate anyway.”
The fact that borrowers will be asked to contribute a share of the profits on their long-term investments highlights the need for quality advice. Castle Trust has previously faced accusations from former Private Finance director Melanie Bien that the offering is too complicated for borrowers to fully understand.
Bien previously told Money Marketing’s sister publication Mortgage Strategy that people in the industry have experienced difficulty in understanding the product, raising the issue of whether borrowers are likely to understand it.
Bates says: “It is a different offering but it is certainly no more complicated than the Government schemes that are out there because it is still a question of having more than one lender on the mortgage.”
The Council of Mortgage Lenders notes that such initiatives represent innovation that has been in decline in the mortgage market since the financial crisis. A spokesman says: “Since the credit crunch, variety in the mortgage market has contracted and moves to open it up will be watched with great interest. While risk management and consumer protection are obviously extremely important, new entrants and market innovators can make a valuable contribution to a vibrant, healthy housing and mortgage market in the UK.”
London and Country mortgage specialist David Hollingworth says that while innovation is welcome in the current market, it remains to be seen whether borrowers will be willing to sacrifice a percentage of their long-term investment.
He says: “The key question will be just how many people are prepared to give up their share in any potential growth in their property for the sake of paying less on the traditional mortgage. The difficulty is that people cannot quantify how much it is going to cost like they can if they just take a normal mortgage.
“You have to welcome anything new to the market. I am not saying everyone will rush to use this kind of approach but it will be interesting to see how it shapes up in terms of who uses it and how.”