Probably the most innovative product of the year has been launched just as Christmas is upon us. But unlike other recent launches that favour only borrowers this initiative could bring festive joy to both borrowers and investors.
Firstly, for borrowers a company called Castle Trust has created a new form of mortgage finance. It works like a shared appreciation scheme where it will fund 20% of the cost of a house in return for 40% of the profits. For example, if you borrow £60,000 on an £100,000 house but need £80,000 as you only have £20,000 deposit, they will fund the £20,000 you need. This amount has no interest to pay on it, but say the house is later sold for £200,000 they will take 40% of the profit of the house sale, that equates to £40,000. Home buyers instinctively shy away from sharing profit, but for some this sort of arrangement could represent a very fair deal. For example, the publicity material indicates that if house prices rise at less than 3.5% per year then borrowers will save more in interest than they would give up in shared profits. Also, by borrowing 60% off their lender they should be able to obtain a more competitive interest rate.
For investors the deal to fund the mortgages breaks new ground as the investment is in residential property. Housing at £4.3 trillion, is the biggest asset class in the UK, bigger than corporate and government bonds, commercial property and the FTSE all share index all put together. In addition residential property has delivered the best risk adjusted returns over the last 30 years. But until now the only way to invest outside of your own property was to enter the market through the buy to let route. Now this has changed with investment through this route being allowed in self invested personal pensions and ISA’s. By using these wrappers, valuable tax and capital gains savings are made, as they are sheltered from the taxman. The investment product is called a HOUSA and you can commit for a fixed term of either three, five or ten years, with returns based on the movements of the Halifax House Price Index. To give an example over 5 years you can obtain 150% of the rise but just 50% of the fall. For example, if you invested £1000 and the index rose 30% then you would get 1.5 times the rise bringing your total to £1450. If the index fell 30% you would shoulder half of the £300 loss, therefore your return would be £850. Simulated performance from the Halifax Index has shown that since the Index started the best 5 year performance has taken the original £1000 investment to £2628, with the worst 5 years returning £824.
As you can see from the above statistics you can lose money on these investments, but if you are thinking that houses have got a reasonable prospect of gain over the next few years then this investment could be for you, and it even has a regular income option if required. I would imagine that the companies target market will be people interested in buy to let but without the saving or commitment to take a hands-on approach. They might also appreciate that the tax efficiency of this arrangement versus the buy to let, coupled with the guaranteed exit point would make good sense for most investors. Also it is worth mentioning that the index covers the whole of the country rather than the small part of the country where your buy to let is situated. Therefore the index investment will not suffer from concentration problems. Finally, this investment may be of interest to parents/grand parents to invest money for their children/grandchildren, as these monies will protect a potential deposit on a house, as the investment will move with prices, making it an ideal (but perhaps under appreciated for now) Christmas present.
Kieron Bassett Financial Services have two Independent Financial Advisers who specialise in mortgages. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
10th December 2012
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