New product to the market - possible help for people who cannot borrow enough?

homer_j_3

There has been a new product launched this week which is aimed at people who have a deposit but cannot borrow enough to buy a property or are struggling to release enough of their equity in their current property through a traditional remortgage.

The product works something along the lines of this:

5% deposit
upto 80% conventional mortgage (int only or repayment)
15-35% on a lifetime fixed of 2.99% interest rate on int only.

The deposit + conventional + 2.99% fixed must add upto 100%

The affordability is calculated on affordability and is not 3 x income etc. Because they use this method, it allows you a maximum monthly payment that can increase your borrowing by placing a higher % on the 2.99 low fixed rate.

This 2.99 fixed rate % is key because this is how this product can be offered. When you come to remortgage or sell in the future you have to pay this % back on the difference in value.

Sounds complex? Here is a working example:

You buy a house for 100k

deposit = 5k (5%)
convetional mortgage = 80k (80%)
low fixed rate = 15k (15%)

You live in the house for 3 years and you sell/remortgage the house and it is valued at 200k.

200k -100k (difference between original value and current value) = 100k
100k x 15%(low fixed rate % of original value) = 15k

This 15k is added to your debt and you keep the remaining equity. Alternatively, if a negative equity situation happens, then this is shared too.

I know that this is something completely new and once you get your head around it, something that is pretty straight forward lol. I did a quote for a client earlier in the week and I was able to get him an extra 30k over a traditional mortgage for less per month. As he was struggling to find a house on traditional income multiples, this worked great.

You own 100% of the property unlike shared ownership so it cant even be classed at that.

I know that due to the nature of the product it is only available through brokers, however, I feel that for the correct individuals, it could be of a help to them.

What do you think?

F_T_Buyer

Here's a link: http://money.guardian.co.uk/property/firsttimebuyers/story/0,,1834242,00.html

I guess it's called a shared appreciation mortgage.

It's another product to keep house prices artificially high. It won't benefit anyone, the customer will only have to rely more on these type of deals when the move up the 'ladder' as the next step will be even further out of reach.

But don't forget the banks want to make money, they will be making very little money on the 2.99%, and I guess this product will soon be scrapped when credit tightening comes.

Xbigman

Isn't this still a SAM? OK you own 100% of the property in theory but in practice you have a pretty big drag holding you back that has all the bad points of a SAM and you get to pay 2.99% interest too.
This smacks of desperation by the banks to find an excuse to lend more.
We would all be better off if it did not exist.
Regards



X

meanmachine_2

Classic bubble mortgage.

If I was a shareholder in a bank racking up bad debts, I don't think I'd want my company exposed in this way to a "share of negative equity".

But then, I'm old fashioned.

homer_j_3

As it says in the link above, it is called flexishare and you own 100% of the property so its not really a product that competes against anything.

The product is backed by a massive american bank so I am confident that the money is there to fund the 2.99% interest rate for the lifetime of the mortgage as they expect capital appreciation on this through the lifetime of the product.

I dont think prices in the UK are "artificially" high but yes you are right in saying that more and more people are going to have to rely on these products and I think that given the choice of owning, renting or a mixture of the two - owning is still the preferred choice in the UK so if this can allow people to do this then, why not???

I dont see a negative to this at all in terms of helping people achieve home ownership where otherwise impossible.

However, I do appreciate the comments on this as I like to understand what other peoples take are on these things.

Norbert_Colon

This article argues that this new product is less dangerous than other shared appreciation mortgages because the lender's share of profits is capped.

meanmachine_2

The simple fact is, if banks were regulated to 3.5 times single earnings, house prices wouldn't spiral upwards, we'd all have more in our pockets and the economy would be in a much better shape.

These new "products" simply add petrol to the bonfire.

You don't get them in a rational market where prices are in line with earnings.

jamesd

homer_j, is this product available only to those who can't meet conventional multiples or is it available to those who can easily do so but prefer not to? What is the interest rate on the conventional portion like? Are overpayments and payment of the equity obligation without sale allowed?

Consider a 100,000 mortgage with 5% repayment interest rate on 65% and 2.99% rate for 35%. The reduced interest rate on the 35% would allow 700+ more paid off the capital of the repayment portion in the first year, resulting in faster repayment of that loan.

Something of a gamble in this because it's assuming that the extra repayments happen at a rate greater than the appreciation rate of the 35% interest in the equity, otherwise that equity obligation results in a loss overall. Makes this concept more interesting where low increases in value are expected. The rate on the repayment portion also has to be reasonably competitive.

Xbigman

If the lender is responsible for a portion of negative equity, then can they veto a sale? If they can then you would be trapped in negative equity exactly as doing this the ordinary way.


Regards



X

homer_j_3

The lender cannot veto the sale if in a negative equity situation as they have no say in what you do with the property.

There are 2 fixed rates at the moment a 2 and 3 year deal both under 6% with the 2 year having an overhang on the red charge. The product is only available through brokers and is open to anybody that would be applicable for a "prime" product.

jamesd

2 year stepped: year 1: 5.69%, year 2: 6.69%, then 7.25% to term (libor + 2.5% variable). 2.99% fixed on capital share portion.

3 year stepped: year 1; 5.99%, year 2: 6.99%, year 3: 7.24% then 7.50% to term (libor + 2.75% variable). 2.99% fixed on capital share portion.

Approximate calculation on the best case of a 5 year term at approximately 6.2% for two years leaves about 38000 outstanding on the repayment portion at the end of year two, a 38:35 blend with blended rate of 5.21%. For three year version approximating at three years at 6.5% leaves about 26000 outstanding, a 26:35 blend with blended rate of 4.91%. Monthly repayments of 1250 (87 on the 35000 2.99% portion) to get to this point on the 3 year stepped form with 95000 borrowed; requires gross income of 37500 and no other debt to pass affordability test at this level. Those rates rise closer to 5.4% and 5.55% with a 25 year term. The approximations produce rates that are a little higher than the actual rates would be.

Also 6% early repayment charge year 1, 5% year 2, 4% year 3 (including two year version) then either one month's payment or one month notice. Only 1,000 per year capital part payments else pay the ERC.

Just to be comprehensive: minimum 5,000 payment on the residential ownership loan and capital share combined (that is, the portion that isn't a normal repayment loan), can't pay off one without the other, valuation required. Can make structural home improvements increasing value more than 10% and keep all the benefit, anything less or non-structural is part of the appreciation. Affordability-based lending allowing 40% of gross income to be used for all debt payments including this loan.

For someone borrowing for a 5 year term who wants to reduce exposure to property price drops and is willing to accept the exposure if the price rises, the blended rates look somewhat interesting, particularly for the two year product. Calculations above don't include a repayment vehicle for the 35% plus 35% of appreciation portion - remortgaging, selling or some repayment vehicle would be required at year 5.

Still, this doesn't look like a product most would want for a significant term - rates look more like near-prime and would need to be 1% or more lower to be really interesting. Looks to me as though a more traditional mixture of repayment and interest only is likely to produce a better deal.