Is new 'profit sharing' mortgage a mistake?
The company argues that it provides access to the most competitive deal, but in return, homeowners will have to pay a proportion of the increase in the value of the property. So is this a disaster waiting to happen?
The loan from Castle Trust will need to be repaid after 25 years or when the owner reaches the age of 65. At this point, they have to pay Castle 40% of the increase in the property's value - plus the return of the loan.
ConcernsIt has raised concerns among some commentators. They argue that if you buy a home for £200,000 and over 25 years it increases to £300,000, you'll need to pay £40,000 - plus the original £40,000. If you don't happen to have that sort of money handy, there's every risk you will have to sell your home to repay it. This is likely to leave homeowners stranded at just the point when they cannot do anything about it.
BenefitsHowever, others argue that this product will still suit some people. Ray Boulger, technical manager at Charcol, one of three brokers licenced to sell the product, points out that in the short-term there are two financial benefits.
First, you will be paying interest on a smaller mortgage. And second, because you have a bigger deposit you will be paying it at a lower rate.
The sumsHe highlights that at the moment, over five years, a 60% mortgage could cost around 2.95% and an 80% mortgage 3.79%. He says: "It depends on how important cash flow today is. You may have a commitment like school fees, which you cannot pay at the same time as the full mortgage. Alternatively, you may say there's no way you want to give up future capital growth, no matter what."
He adds that how competitive the mortgage proves will depend on how the housing market performs. His calculations show that if house prices rise 3.5% a year then this mortgage will work out at the same price as a traditional loan.
If they fall, or rise less, then the deal will be cheap: if they rise more, then it will prove expensive. However, he adds that the longer the term you are considering the mortgage for, the harder it is to forecast what will happen to prices.
He concludes that the product can only be sold by adviser - who have to undertake training and sit an exam before they are allowed to advise on it. The buyer will then understand the pros and cons, and should only go into the arrangement if they understand the best and worst possible scenarios.
But what do you think? Do you like the look of the deal? Let us know in the comments.
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