As you know I welcome Guest Blog spots so I am delighted to host Mikkel Bates, Head of Marketing at Castle Trust who has contributed the following :-

Shared equity – a shot in the arm of the housing economy

Regular readers of this blog will have seen the recent response of its editor Andrew Montlake to the government’s Help to Buy Scheme (see the previous post).

The initiative could provide a welcome boost to the housing market, Andrew concluded, but the devil will be in the detail.

For what it’s worth, we at Castle Trust agree. But we also see the initiative as an endorsement of an entire system of funding home buying – that of shared equity.

So what is shared equity?

As with traditional repayment mortgages, it’s a way of buying a home. The difference is that the buyer takes out a traditional mortgage from a primary lender for a portion of the amount they need to buy the property and secures the rest, in the form of shared equity, from a second lender.

In the case of Castle Trust’s shared equity Partnership Mortgages, the primary lender lends up to 60%, while Castle Trust lends 20% and the buyer provides a deposit of at least 20%.

With shared equity, there are generally no ongoing payments. Instead when you sell your home the shared equity provider is given a share of any increase in value or they will share any downside, effectively insuring against the chances of falling into negative equity.

We believe there are three obvious winners from using shared equity for home buying:

1. The customer. Ownership with a mortgage is a very risky thing; most people do not appreciate that the risk attached to an individual house is similar to that of investing in the FTSE 100 index. Shared equity reduces risk. It can also help reduce monthly mortgage payments, lessen the impact of interest rate rises and insure against the chances of negative equity.

2. The banking system. Because banks and building societies are lending proportionately less in each transaction, shared equity takes a significant proportion of the house price risk out of the banking system, reducing credit risk and credit losses.

3. The economy. Banks lending less per mortgage frees up their capital, allowing them to lend to more customers for the same amount of capital or to increase lending to other sectors of the economy.

So, as you can see, shared equity provides benefits throughout the economy, not just for individual home buyers.  Government endorsement of shared equity should provide a welcome shot in the arm for the UK economy by freeing up banks’ capital to be put to good use.

 

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