Investors to be offered one-way bet on UK house prices
02-02-2014
By Thomas Hale
A mortgage company is offering investors a one-way bet on UK house prices, with a bond that will track a residential property index but return capital if property values fall.
In a sign of the growing confidence that house prices will continue to rise, Castle Trust is now offering 100 per cent capital protection on investments in its latest ‘Growth Housa’ bonds.
These bonds, which were first launched in October 2012, offer returns in line with the Halifax house price index.
Early versions, which had terms of three, five or 10 years, gave investors exposure to the upside or downside in the index.
However, the new bonds – set to launch in February – will pay a return in line with house price inflation over those same periods, or return all original capital if prices do not rise.
Castle Trust’s move comes as economists and politicians have warned of a UK housing bubble – fuelled by the government’s Help to Buy scheme and increased mortgage lending.
But Danny Dorling, a professor at Oxford university, said that while the Castle Trust bonds represented a “punt” on rising house prices, this was not necessarily an irrational strategy in the current climate. “People are aware of how politically hard it is not to maintain high house prices,” he said.
House prices rose 7.5 per cent in 2013, according to the Halifax house price index that the new bonds will aim to track. According to Halifax housing economist Martin Ellis, prices across the UK are forecast to rise “at a broadly similar pace” this year. “Overall, prices nationally are forecast to increase in a range of between 4 per cent and 8 per cent,” he said.
Apart from Castle Trust's bonds, the only other way to track the UK housing market has been through spread bets – although these offer no protection from price falls. Many providers withdrew them during the financial crisis, but IG Index is still promoting them to its clients.
Castle Trust is offering its bonds to help fund its mortgage products, which allow borrowers to give up a slice of the future appreciation in their property’s value.
For sale signs uk
Price indices have presented wildly contrasting pictures of the health of the housing market – according to some the boom is back, while to others the slump staggers on
It advances secondary mortgages – of up to 20 per cent of a property’s value – to buy-to let borrowers or existing owners who want to release equity from their homes.
But instead of demanding interest and capital repayments during the term of the loan, Castle Trust instead takes up to 40 per cent of the property’s appreciation when the loan period ends, and a repayment of the original capital. At this point, borrowers may have to refinance or sell their property to pay Castle Trust back.
Loan terms are up to 10 years for buy-to-let borrowers and up to 30 for owner-occupier borrowers.
Henry Pryor, an independent buying agent, said Castle Trust’s offering was reminiscent of innovative approaches to lending during the last housing boom. “This may reflect a return to the days of imaginative financing last seen in 2007,” he said.
Matthew Wyles, senior adviser at Castle Trust, said its interest-free secondary mortgages were intended to meet demand from buy-to-let investors, and from parents needing to release equity to help their children with deposits for their first homes.
“Setting aside buy-to-let, our single largest line in the owner-occupier space is the bank of mum and dad,” Mr Wyles said. “In many cases, those people do not want to have to go back to the burden of a monthly mortgage expense.“
According to Hometrack, there is £3.4tn of equity in the UK housing market, compared with just £1.2tn of debt secured on dwellings. However, existing equity release schemes are typically targeted at elderly homeowners needing cash for at-home care.
Richard Donnell, director of research at Hometrack, suggested that the demand for alternative ways to borrow against property reflected the increased level of equity tied up in UK housing.
“Society needs to find new ways of recycling equity,” he said. “There are some issues as we move towards pension provision – a lot of people see their houses as being their pensions, which they hand down to their children. But households are increasingly going to have to use their equity themselves.”
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