Monday, 20 June 2011

New mortgage deal would give buyers 20% deposits

An extraordinary plan has emerged to revolutionise the mortgage market by bankrolling house buyers.

Aimed at both house movers and first-timers, it would give them a 20% deposit in return for a 40% share of any profits from an eventual sale.

It would also share any losses if house prices fell.

Behind the venture, Castle Trust, is Sir Callum McCarthy, a former chairman of the Financial Services Authority, and US private equity firm JC Flowers.

McCarthy chaired the FSA between September 2003 and September 2008, and at one stage was hauled before Parliament to defend the FSA’s handling of the Northern Rock crisis.

JC Flowers entered Britain’s financial services sector last year by investing in Kent Reliance Building Society and turning it into a bank. It has made clear its plans to do more deals.

McCarthy became European chairman of JC Flowers in November 2009.

Under the new plan,  Castle Trust would raise the money for the deposits by selling bonds to investors. Their returns would be dictated by the Halifax house price survey. Investors could take out stakes from £1,000.

While the business model has yet to gain approval from the FSA,  it would not need a full banking licence.

Castle Trust says its management team has “extensive investment and mortgage industry experience”.

McCarthy has recruited a heavyweight board, including John Gummer, now Lord Deben, who is chairman of the Association of Independent Financial Advisers. Dame Deirdre Hutton, a non-executive director of the Treasury and ex-chairman of the National Consumer Council, is also on the board.

McCarthy says that Castle Trust is structured in such a way that JC Flowers will make money regardless of whether house prices go up or down. JC Flowers has pumped £100m into the venture.

McCarthy said: “This is something genuinely innovative.

“There are thousands of people struggling to get on the housing ladder, or struggling to raise the deposit to move into a bigger house to cope with a growing family.

“Then there are people who want to invest in the housing market but don’t want to get caught up in the complications of a buy-to-let property.

“We’ve found a way to intermediate between those two groups of people, and that could become something quite powerful.

“It does sound too good to be true. We all had the same reaction when we looked at it. But we’ve spent two years modeling this.”

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