The small print without any hidden catches

This is the time of year when ‘For Sale’ boards start going up outside properties around the UK, as the traditional spring surge in housing market activity gets underway.

Related topics:  Mortgages,  Special Features
Vadim Toader | Proportunity
19th April 2022
Proportunity Vadim Toader
"If the value of the property decreases after the loan is taken out then the percentage that the borrower has to repay is reduced accordingly."

The indications are that the same will be happening again this spring, despite rising interest rates, property prices and cost of living.

Lack of supply is continuing to drive the market, together with people deciding to move in order to make lifestyle changes in the wake of the pandemic.

Recent figures from Halifax have shown that UK house price growth stood at 10.8% in February, the fastest rate of price growth since June 2007.

Nevertheless, questions have been raised about whether house price growth will continue at the same pace given the wider global context of the war in Ukraine and the continuing impact of the pandemic.

Housing market

While some might argue that a cooling of the housing market would be no bad thing, the possibility of house prices growing at a slower rate can raise concerns about property price stagnation, or even worse a housing market crash such as that which happened in the 1990s as a result of inflation, and again in 2008 because of the global financial crisis.

Understandably, this gloomy financial backdrop means mortgage advisers are having to keep in mind the possibility that a homeowner could find themselves in negative equity, and as a result some might be cautious about suggesting to clients options that could be regarded as taking on extra debt.

Yet not all debts are the same. Anyone who adheres to the old saying that ‘The large print giveth and the small print taketh away’ and expects to find hidden catches terms and conditions will have a pleasant surprise when reading small print for Proportunity’s shared equity loans.

These are not provided as a fixed sum of money to be repaid, but instead as a percentage ranging from between 10-25% of the value of the property being purchased. The monthly repayments are interest-only and do not go towards repaying the amount of the Proportunity loan. Instead, the property is revalued for the purpose of repaying the loan, and the amount paid back is the same percentage as originally agreed for the loan.

Crucially, however, if the value of the property decreases after the loan is taken out then the percentage that the borrower has to repay is reduced accordingly.

Fairest way

We believe this is the fairest way of having a shared equity loan, as it means that Proportunity literally wins or loses together along with our borrowers.

People taking out a shared equity loan from Proportunity do not risk finding themselves in the same situation as those who took out Shared Appreciated Mortgages in the late 1990s. These were mortgages arranged as a form of equity release, with the lender loaning borrowers a capital sum in return for a share of the future increase in the value of the property.

The small print in the terms and conditions of these mortgages meant that not only did borrowers have to repay their lender the amount they had borrowed, but they also had to pay a share of the appreciated value of their home since the loan was taken out. This could be anything from one times the loan to value ratio (LVR) if interest had been paid, to three times the LVR if the loan had been interest free - which typically amounted to 75% of the growth in value of a property.

The shadow of these loans still lingers today, and we have been concerned to discover that some people have inaccurate preconceived notions about Proportunity because we provide second-charge equity loans.

In fact, the team at Proportunity had to spend a long time arranging debt funding because we wanted to make sure we did the right thing for our borrowers, and with that in mind decided to only have loan terms that we would want to use ourselves.

Second charge

For example, at the time of writing a second charge interest-only mortgage of £60,000 from Proportunity for a property purchase of £400,000 payable over five years would require 24 fixed monthly payments of £299.50, followed by 36 fixed monthly payments of £424.50.

This is based on an initial fixed interest rate for two years of 5.99% followed by three years at a fixed interest rate of 8.49%, after which time the interest rate reverts to 10.74% variable (Bank of England base rate, currently 0.75%, plus 9.99%).

Assuming that the home value increases by 5.5% per annum (current CPIH) to £522,784 then at redemption in year five the shared equity amount due is £78,417.60 (original capital balance of £60,000 plus an additional shared equity increase of £18,417.60). The total amount payable would be £101,986.60 (loan amount including a £999 product fee paid upfront, plus the shared equity element, plus £22,470 interest and a £100 discharge fee). The overall cost for comparison is 13.0% APRC.

If the property value decreases to £380,000 at redemption, the shared equity element due would be £57,000 and the total amount payable would be £80,569. The overall cost for comparison is 7.2% APRC.

Good investment

Of course, we want to give our customers the best chance of owning a home that has the highest potential of going up in value, so before issuing any loans we calculate whether a property purchase is likely to be a good investment which will see an increase in its equity.

We make this assessment using technology unique to us, our Proportunity Home Index (PHI), which combines 150 factors that can affect value. Of these factors, 25 million data points are directly related to the property, such as historical transactions of properties in England and Wales from Land Registry and energy performance, and 13 million data points take into account micro economic aspects, such as crime rates, unemployment rates, demographic information, school ratings and businesses.

This means that anyone contemplating boosting the amount of their deposit with a Proportunity loan, and getting a better blended interest rate as a result, will be able to see if the property they are hoping to buy is overvalued, or undervalued.

The potential for the value of some properties to rise more substantially than others is not currently reflected in the way in which mortgages are calculated. At Proportunity we believe this is a flaw in the system, as failing to take this into account means that the ability of some homes to enjoy a significant increase in equity is also overlooked.

Unlike the government’s Help to Buy scheme, which will end in March 2023, Proportunity loans can be used to boost the deposit for older properties as well as new build ones. Many of these have the potential to be refurbished, and to as a result see a significant increase in value.

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