Castle Trust has today launched an innovative new product for mortgage borrowers called ‘Partnership Mortgage’ but is it a good deal, what are the benefits and what do consumers need to be aware of?
Andrew Hagger of Moneycomms.co.uk looks at the pros and cons and provides a range of scenarios showing the potential costs and benefits for borrowers.
- Partnership Mortgage (PM) is a mortgage for 20% of the value of a home
- The borrower must have a minimum of 20% equity in their property or a 20% deposit to put down.
- The borrower must have a capital and interest repayment mortgage from another lender for the remaining amount of between 20% and 60%.
- There is no interest payable or monthly repayments on the 20% Partnership Mortgage, instead Castle Trust will take 40% of any increase in the value of the home when the property is sold or the PM is repaid.
- Borrowers must have a good credit record and prove they can afford to service an 80% LTV mortgage, even though they may only making repayments based on borrowing at 60% LTV.
- If the PM is used to purchase the property and the sale value is less than the original valuation, Castle Trust share 20% of the fall in value (note this is only for purchases only, not remortgages)
How does the Partnership Mortgage work?
- You take a Partnership Mortgage for 20% value of your property and you borrow a further 20% to 60% of the property value from a traditional mortgage lender.
- Castle Trust will take a 2nd charge on your property
- Even though you may borrow up to 80% LTV overall, the sum on which you pay interest and make monthly repayments to the traditional lender will be for a sum between 20% and 60% of the value of your property.
- When you sell your property or repay the borrowing, Castle Trust will take 40% of any increase in the property value.
What does it cost?
- There is a fee of 0.4% of the value of the home at the outset (not the amount borrowed)
- Valuation fee payable on purchase £195 + VAT
- Telegraphic Transfer fee £35.00
Is it right for everyone?
The Partnership mortgage is available for properties valued at between £50,000 and £2,000,000
It’s definitely not suitable for people who believe that there is the possibility that their home is likely to increase significantly– e.g. central London.
The product will have more appeal to people in areas of the UK where property prices are less volatile.
You are not permitted to rent out your property if you have a PM nor use it for buy to let or a holiday home.
If you want to remain in the home at the end of the mortgage term, you must have access to funds to enable you to repay the PM and 40% increase in value of your home.
The Partnership Mortgage is not available on properties less than 2 years old or properties being purchased direct from a developer.
The actual cost of a PM is unknown at the outset, as the amount you repay depends on what happens to the value of your home between the date you take out the partnership mortgage and the date you sell your home or repay the partnership mortgage.
Similarly, as there are no repayment mortgages available with fixed rates for the full term, you do not know the actual cost over the term of that. The key differences with a PM are that there are no monthly commitments that could be affected by changes in mortgage rates and you only pay back more than you borrowed if your home has increased in value when you sell it (or reach the end of the term).
The amount you borrow from the traditional lender is a lower LTV and therefore there is a good chance that you will borrow at a lower interest rate.
The product is good news as far as lenders are concerned as they will be taking less risk and also because they are lending at a lower LTV will benefit from having to maintain less capital reserves.
You don’t have to make any monthly repayments on the 20% stake you borrow from Castle Trust; therefore your monthly outlay is significantly reduced.
The 20% Partnership Mortgage element of your borrowing is safer than a traditional mortgage as you are protected against interest rate movements.
The reduction in monthly repayments on the mortgage is the main benefit, this could help people fund university costs for their children for example or allow them to buy a home with more room, without having to massively increase the monthly mortgage repayment.
How is this different to the much criticised Shared Appreciation Mortgages from the 1990’s?
People and the media may write this off as another shared appreciation mortgage scheme but even though you forgo 40% of any increase in value of your home, it’s very different from the SAMs sold between 1996 and 1998.
The main issues with SAMs were: (i) that they took 75% of any increase in value from customers, and (ii) that they were often taken out by the elderly and provided on a non-advised basis.
Because customers only kept 25% of any increase, as their home rose in value not only was the SAM very expensive, but their loan to property value (LTV) continued to rise, causing it to become increasingly difficult to remortgage.
This difficulty in remortgaging was exacerbated because the elderly customers were generally not employed and their mortgage options were limited. These customers became trapped in their homes as house prices rose. In stark contrast, with Partnership Mortgages (which are only advanced to creditworthy customers between the ages of 18 and 55 and must be repaid before they are 66) the customer retains the majority of any increase in value and their LTV reduces as the property value increases. This reduction in LTV is reinforced by the repayment of the first charge mortgage, regardless of house price direction. So it becomes easier to remortgage the Partnership Mortgage over time even if the home rises in value.
The Partnership Mortgage liability, unlike a SAM, is reduced if your property value decreases.
The Partnership Mortgage can only be sold through brokers who have passed specific adviser training accredited by the Chartered Insurance Institute.
It’s a fairly niche product but does give borrowers another option to consider.
It will work for some people, but the uncertainty surrounding the final amount payable will undoubtedly put some people off.
However you could argue that traditional mortgage borrowers tend to forget that there is also great uncertainty over how much their mortgage will cost them each month in the future and, by extension, over the full term.
As long as borrowers fully understand the potential outcomes based on a range of scenarios (including extreme examples) then at least they are in a position to make an informed choice.
There is a trade-off between lower monthly outgoings (perhaps as much as 30% lower per month) for as long as you are borrowing against losing 40% of the increase in the value of your home.
The examples below (plus summary of all six scenarios) highlight the overall financial cost or benefit of a PM is against a traditional mortgage and it’s worth remembering that the calculation takes account of losing 40% of any increase in property value, but this is offset but lower monthly mortgage repayments over the term of the borrowing.
Verdict - For those who fully understand the potential impact of house price movements and are keen to reduce their monthly outgoings while not knowing what the future value of their home will be then this is a HIT.
However if you are not comfortable with the uncertainty of the outcome or live in an area where house prices are volatile and have the potential to rise rapidly then this product would not be right for you and would be a MISS.