Castle Trust could drive house price stability
Second charge equity loans that force borrowers to share house price appreciation with their lender could dampen homeowner appetite for house price inflation and lessen the need for LTV caps.
This was the claim made by former Monetary Policy Committee member Kate Barker at a debate on the future of housing hosted by Castle Trust yesterday.
Barker said: “We’ve all become more concerned about house prices rising very quickly and if you think about the way the Bank of England and financial policy is developing I think you can’t necessarily assume it will be as easy to have a period of unchecked house price inflation as it has been in the past.
“We may find we’re in a slightly different world where these products will be much more important.”
Her comments were in response to the Castle Trust partnership mortgage which the lender hopes to launch in December. It will offer borrowers under the age of 55 with a 20% deposit an additional 20% second charge loan with no monthly repayments.
When the property is sold or the mortgage term ends, the borrower repays the 20% advance plus 40% of any increase in the property’s value. If the property loses value Castle Trust will pay borrowers 20% of the loss.
Though the product is intended to help lenders offer more mortgages at 60% LTV and help borrowers afford larger properties by topping up their equity, Barker identified the added benefit of putting the brakes on borrower appetite for booming house price.
She said: “The attractive thing from the longer term perspective is that the people taking the partnership mortgage’s interest in house prices rising is rather less.
“That’s a problem if the rest of the market is still keen on house prices rising but if this kind of product became more common I think it would have a good effect on the way the housing market behaves longer term.”
Financial Services Authority chairman Adair Turner has repeatedly referred to the possibility of allowing regulators to impose loan to value limits on lending to consumers if it identifies a developing house price bubble in an attempt to avert the housing market overheating in the future.
But if the market for this sort of product grows the claim is it could impose self-regulation on house price appreciation.
Also speaking at the debate Professor Susan J Smith, a housing academic at Cambridge University, said together with Castle Trust’s House Price Index linked investment HouSA, mortgage products like this could change the structure of the housing market altogether.
She said: “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.
“If there was a way for people to hold their deposit that protected it against house price inflation - like in the HouSA that’s being proposed - then you could wait to buy because you wouldn’t be priced out of the market. That would take a lot of pressure off many parts of the housing market.”
Castle Trust is chaired by former FSA chair Sir Callum McCarthy and has the backing of JC Flowers & Co, a private equity investor.
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