A startup called Proportunity offering first-time buyers an alternative to the Help to Buy equity loan will launch in July.
First-time buyers will be provided with an equity loan of up to 15% on a property, new build or not, enabling those with a 5% deposit to secure an 80% loan-to-value mortgage with another lender.
Proportunity will provide first-time buyers with an interest-only loan with a rate of around 8%, after which borrowers are referred to an adviser to take out an 80% LTV mortgage – and potentially benefit from a cheaper overall cost.
The launch is subject to the FCA providing change of control approval to acquire a regulated mortgage lender.
Stefan Valentin Rusu, head of business development at Proportunity, said: “You can always get a 95% LTV mortgage from a first charge lender but how much does that cost – 4-5%?
“It’s quite expensive. You are better paying rent.
“We wondered ‘how can we help these people access their homes earlier?’
“We created a ‘Proportunity loan’ – it is an equity loan that works exactly the same as Help to Buy without the same restrictions.”
In line with other equity loans its value appreciates or depreciates depending on house price changes.
After five years of holding the equity loan customers are expected to remortgage and pay it back, although they will have the option of extending the loan or reducing the size.
Proportunity started by developing a machine learning tool which predicts house price movements localised to a couple of streets.
This was initially sold to hedge funds and banks to monitor how properties are performing, but it is now being put to use in this different venture.
Proportunity will only provide the 15% loan in areas where it expects house prices to grow based on the tool. Consumers will be able to find out whether they are in such an area by typing their details into Proportunity’s online platform.
Rusu hopes this is something the firm can use to its advantage: banks approached by customers with a ‘Proportunity loan’ are likely to be in areas where house prices will grow.
While it’s clearly early days for Proportunity, there’s a £20m fund behind the venture, as well as investment from Savills and Starwood Capital.
To get the project off the ground Proportunity plans to partner with ‘big broker brands’, while it will hold a launch event in July.
It will initially focus on the London housing market, before moving to Manchester and potentially other UK cities.
Keith Barber, director of business development at Family Building Society, was asked how he would view a customer coming to the lender with one of these equity loans.
He said: “We would typically treat the equity loan as a financial commitment.
“However we would look at it as an 80% loan; we wouldn’t look at it differently to most other cases.“
While he acknowledged that shared appreciation mortgages from the likes of Barclays have a sketchy history, he felt this new offering could provide a viable solution providing all the different scenarios are considered.
He added: “I’ve seen three or four of these propositions in the last six months, which work with investors trying to create a Help to Buy equity loan for the private sector.
“If they can be made to work I think the regulator would be fine with them.
“As long as the outcomes in different scenarios are reasonable and consumers know what they are getting into there isn’t a reason why it wouldn’t work.
“The key is always what happens when something goes wrong.”
Rusu felt banks will view the venture positively, because they are provided with high LTV customers who are difficult to acquire, without having to take on extra risk and allocate extra capital on their balance sheet.