Castle Trust has introduced the Family Friendly Mortgage, a homeloan with no monthly repayments. How does it work?
Partnership lender Castle Trust has come up with a new kind of mortgage, aimed at making it easier for young homeowners and buyers to become new parents.
Castle Trust, a specialist lender in UK equity loans, has launched the Family Friendly Mortgage. It's an equity loan with no monthly payments, with the idea that it reduces the income strain of home ownership when one partner takes a career break to raise a family.
Castle Trust invented this 'income bridging' product for new parents after noting that there were nearly 730,000 births in England and Wales last year - a generational high. At the same time, the average age of first-time mothers has been steadily rising for over 30 years, partly due to the financial strains of parenthood. In 1970, the average age of a first-time mother was 23.9 years, but had shot up to 30.7 years by 2012.
Sean Oldfield, Chief Executive Officer of Castle Trust, argued that the impact of losing one income has made it progressively more difficult for younger couples to combine children with home ownership.
He added: "We have worked really hard to design a product and lending criteria which will help new parents crack this problem. Our new product will reduce a couple’s monthly mortgage payments by at least 25%."
How it works
Here's how this novel home loan can lower your payments by a quarter, easing the financial outlay of a new baby:
- The Family Friendly Mortgage is a 'second-charge equity loan' (in other words, a second mortgage) of up to a fifth (20%) of the value of your home.
- Therefore, only borrowers with existing loan-to-value ratios of up to 80% are eligible.
- The loan has no monthly repayments and must be used to reduce the existing conventional mortgage.
- This reduces the monthly repayments of the first mortgage by at least 25% (and even more if borrowers switch their first mortgage from capital repayment to interest-only).
- Applicants’ existing mortgage must be arrears-free.
- The monthly cost of the reduced conventional mortgage must be affordable, based on the one remaining working parent's income.
- Borrowers must confirm that they intend to redeem the Family Friendly Mortgage at a point in the future when the second partner returns to work.
- Castle Trust expects that the majority of applicants will use the Family Friendly Mortgage for between five and ten years.
- There is no minimum term and no early redemption fees. Repayment of the loan may be through sale or remortgage of the property.
- On repayment, Castle Trust receives its original advance, plus two-fifths (40%) of any increase in the value of the mortgaged property, calculated from the date that the loan was taken out to the date of repayment.
Giving up your growth
Of all the above 10 points, the last is surely the most important. In return for a loan of up to a fifth (20%) of the value of your home, you give up two-fifths of all future growth in its value until your Family Friendly Mortgage loan is fully repaid.
In other words, for every 1% of the value of your home you borrow interest-free from Castle Trust, you give up 2% of its future value. Therefore, what this lender loses in interest, it potentially wins from doubling gains from future house-price appreciation. The more a property increases in value, the more this home loan costs. If a home has fallen in value when sold, Castle Trust also shares in any loss.
Of course, there had to be a catch somewhere, because Castle Trust is a commercial company, not a charity. It was launched in October 2012, seeded with £65 million of capital from aggressive US investment firm J.C. Flowers & Co - a major investor in failed bank Northern Rock before it went bust.
How much could it cost?
To show you how a Family Friendly Mortgage might cost in principle, here is a worked example:
|
Home value (at time of loan) |
£200,000 |
|
Existing mortgage |
£160,000 |
|
Size of interest-free FFM loan |
£40,000 |
These borrowers use the £40,000 Family Friendly Mortgage to reduce their existing mortgage to £120,000, reducing their monthly payments by a quarter. Let's assume that they sell their home after 10 years, but how much they will repay Castle Trust will depend on the future sale or remortgage value of their home, as follows:
|
House prices rise by... |
5% |
10% |
20% |
30% |
40% |
50% |
|
Sale value |
£210,000 |
£220,000 |
£240,000 |
£260,000 |
£280,000 |
£300,000 |
|
Owners' gain (60%) |
£6,000 |
£12,000 |
£24,000 |
£36,000 |
£48,000 |
£60,000 |
|
Castle Trust's gain (40%) |
£4,000 |
£8,000 |
£16,000 |
£24,000 |
£32,000 |
£40,000 |
As you can see, were the value of this home to rise by a mere 5% over the next 10 years for a gain of £10,000, £4,000 would go to Castle Trust. For lending £40,000 for 10 years, interest-free, this would be a very poor return for the lender.
However, were house prices to rise by, say, 40% over the coming decade, then Castle Trust makes out like a bandit. The lender's return in this example would be 40% of £80,000, or £32,000. That's an 80% return on its original investment of £40,000 in a decade, which is a fine return in these low-rate times.
History suggests to steer clear
Whether or not the Family Friendly Mortgage works out to be a good deal for the lender or the borrower very much depends on future house prices. Clearly, Castle Trust expects decent increases in property prices in the years ahead, otherwise it would not lend on such terms.
The Family Friendly Mortgage and other shared-equity home loans are simply gambles on future house prices. Given that similar mortgages went spectacularly wrong when the Eighties housing boom turned into the Nineties crash, I'd give them a wide berth.
What do you think? Would you be tempted by a loan like this? Do new parents even need help from a Family Friendly Mortgage? Let us know your thoughts in the comment box below.