Shared equity can reduce the risks of having a mortgage


February 23, 2012

Sean Oldfield is the chief executive officer of Castle Trust


The financing of new housing is so crucial and current a problem for our economy that a committee of MPs is investigating the issue.


The Communities and Local Government Select Committee is looking at the steps that need to be taken by government to ensure that the resources are available to enable the nation’s housing needs to be met.


It is considering both the private sector and social and affordable housing and is hearing from a diverse body of organisations including think tanks, councils, developers, charities, mortgage lenders and academics.


I was pleased to be asked to give evidence but before doing so, I set out the potential problems facing homeowners today in a written submission. Briefly, these are: repossession, negative equity (which impedes the homeowners ability to move home or remortgage onto favourable rates), rising interest rates, inflationary pressure on after-tax incomes, job insecurity and the lack of mortgage availability.


These issues are made all the worse because of the high level of exposure most people have to their own homes.


I believe shared equity offers a solution to all these problems and my key message at the hearing was that they help people reduce homeowners’ exposure to their own homes.


I summarised with these words: “Ownership with a mortgage is a very risky thing to do; most people do not appreciate that the risk attached to an individual house is a similar financial risk to that of the FTSE 100 index.


“When you then go and take a large mortgage against that, you are taking out a very large amount of financial risk on your own home. Being able to de-risk your own home is a very important way in which to manage your financial future.”


In the age of austerity, I felt it was key to assert that Castle Trust’s product, the Partnership Mortgage, would require no taxpayer funding.


As I told the hearing, a customer with a Partnership Mortgage needs a 20% deposit or more. Because of our shared equity, this means that their risk of arrears or repossessions is reduced by about a third, while their risk of negative equity is reduced by a half. It reduces the risk to rising interest rates by at least one quarter, I told the committee.


Again, I’ll simply quote from my own words at the hearing: “Having an equity buffer, be it shared equity, shared ownership, co-tenancy or co-investment, is a way to reduce your financial risk on your own home and reduce the investment part of the decision that you make when you buy a home.


“There is a place to live and there is an investment, and those two decisions are bundled together right now. We are helping people to have less exposure to their own home.”


Shared equity not only helps homeowners; it also helps out lenders, who are facing the seemingly contradictory requirements of government to increase lending and maintain and improve their capital strength.


“Because banks and building societies are lending less per mortgage, they can provide mortgages to a greater number of customers for the same amount of equity capital. Or they can use this extra capital to rebuild their balance sheets. In fact, they can do both.


So I hope the committee will either verbally or in writing support privately funded shared equity because it can take a good deal of risk out of the financing of housing for borrowers and lenders – and has the potential to improve the economy.

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