Is there an alternative quality structured product that can achieve ‘Help to Buy’ without a Government guarantee?
We saw in the FT on 13th August an article ‘Ministers deny loan guarantee scheme will cause UK housing bubble’ which challenges the logic of the government providing guarantees for the Help to Buy program.
This got me thinking about the current mortgage lending situation as I am also aware of the dynamics of generating a 20% – 25% deposit to qualify for a mortgage – just saving will not work as annual property inflation keeps moving the goal posts further away whilst wasting valuable cash flow for rent. I have developed an idea that I would like to share with you that removes the need for any government involvement but would achieve the same intent, increase quality lending by banks, and provide a quality product for asset-backed securitisation purposes.
My idea is based on inheritance capital tied in fixed assets, i.e. the parents/family having capital value locked up in a home with little or no mortgage but not enough free liquidity to assist siblings with deposit requirements. Existing equity release products have rightly attracted much distrust.
I have used as a template: first time buyers, couples up-scaling for a family, and moving for career choice purposes, albeit not limited to these. Their parents could be still working, or have retired, but they have more than enough income for their living needs, but not enough liquidity to assist their siblings. Thus the inheritance that would go to their siblings consists mainly of fixed assets in property which can only be realistically liquidated upon the demise of the parents. There is the possibility to create a quality equity release product that might also be very tax efficient for inheritance tax purposes.
The product includes a mortgage extended to the parents for the amount of the deposit required by the siblings. Assuming that this mortgage amount (including any existing mortgage) is significantly less than 50% of the property value and is easily serviced by the parents from their existing income the lending bank have a quality mortgage. Assuming that the couple can easily service the remaining 75% – 80% of the property mortgage that they need then the bank has essentially lent 100% but has 2 or 3 quality assets and income streams to service the debt we have a package that can easily be securitised should the lender need to free capital. This also allows the couple to use whatever capital they do have to furnish their new home without reverting to expensive credit card repayments.
If the financing for the parents is interest only, i.e. the capital amount would be repaid once the mortgaged property is sold as part of the estate liquidation during probate – we have a valuable inheritance tax planning product.
One ideal use of this product would be the situation where 2 young people intend to get married, would like to buy a home to raise a family but cannot afford the 20% – 25% deposit. Both sets of parents own properties of suitable value, but without enough cash assets to help this couple to achieve their dream home, albeit enough income to service a mortgage on their existing properties. Each set of parents could provide 25% between them through a re-mortgage on their own properties and thus give the couple the best wedding present they could wish for. This type of product has great social value as it allows the parents to give a good start to the adult life of their siblings; a concept very much part of the culture in a number of societies around the world.
If all 3 mortgages are tied together as a high quality lending both in terms of debt to equity (asset security value) and debt service capability we have a high quality package for asset-backed securitisation purposes.
If the government wanted to encourage this type of parental support they could give tax relief to the parents on their mortgage interest payments.
Does this make sense as a quality lending product, as it would be less visible than the proposed Help to Buy government scheme (thus removing fears of housing bubbles), and would be a valuable social product.
- George Osborne’s Help to Buy scheme attacked by economists (guardian.co.uk)
- Mortgages ‘Most Affordable For 14 Years’ (news.sky.com)
- Bank-led equity release boom predicted as remedy to interest-only shortfalls (thisismoney.co.uk)