7-Up, but it’s not all fizz
In June 2006, Advantage, the mortgage lending arm of investment bank Morgan Stanley, announced its Flexishare mortgage. The product was specifically designed to increase the buying power of cash-strapped first time buyers, growing families seeking larger houses and key workers including nurses, teachers and police who may be sidelined by the booming housing market. It allows purchasers to borrow up to an astonishing seven times their annual income — in exchange for a portion of any profits made when they sell their home.
They say the product addresses the gap between high house prices and potential buyers' limited borrowing capacity. Advantage believes that this type of product is the first to respond to the needs of the market which the government has identified in its forthcoming HomeBuy initiative. The product is aimed at prime borrowers who will need a minimum 5% deposit with the remainder of the borrowing being split between a conventional mortgage and a low rate Residential Ownership Loan.
The Flexishare mortgage is the newest product from Advantage. Buyers pay above the average interest rate on up to 80% of the purchase price. But the rest of the mortgage (between 15% and 35%) is made up of a "residential ownership loan", which charges a far lower interest rate. The bank takes a share of any gains equal to the proportion of the residential ownership loan, but also shares in any losses.
Either you can afford to make the higher repayments on a larger loan or you can't, so it is really just another way of encouraging people to borrow more money than they can really afford. Mortgage companies who encourage people to borrow more than they can afford is blamed, among other factors, for soaring house prices — this can only exacerbate the problem. Shared appreciation mortgages won't make houses more affordable but they will encourage people to bid higher. And so the spiral continues.
For those planning to trade up will find another snag when they come to sell as they will have to share any gains with the mortgage company, so it sounds like a solution for people who have exhausted every other option.
Morgan Stanley bought specialist UK mortgage business Advantage in December 2005, highlighting a growing trend among global investment banks to invest in the UK residential mortgage market.
The government said Advantage was joining HBOS and the Nationwide and Yorkshire Building Societies as a private sector partner in a plan to help low-income families and workers such as nurses and teachers to achieve home ownership.
Housing Minister Yvette Cooper said: "As house prices have gone up, more and more families who could keep up with regular mortgage payments can't manage that first step onto the ladder. That's why we think there is scope for more private sector companies to come forward and work with us to develop shared equity schemes to help families get started."
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The overall cost for comparison is 7.1% APR. The actual rate available will depend upon your circumstances. Ask for a personalised illustration. There may be a fee for the mortgage advice. The precise amount will depend on your circumstances, but we estimate it will be 1.5% of the loan amount with a minimum fee of £500 added on to the loan.
Mayfair Consulting Limited is an Appointed Representative of The Mortgage Times Group Limited, 279 Tottenham Court Road, London , W1T 7RJ , which is authorised and regulated by the Financial Services Authority no. 303007.
