Buy-to-let landlords offered interest-free loans (with a catch)
03-02-2014
Castle Trust says its offer will cost landlords 2% of the profit when the property is sold
Patrick Collinson The Guardian
A new interest-free loan is available to 'help landlords expand their portfolios'. Photograph: Alamy
Could this be the next craze in the booming world of buy-to-let? A new lender backed by one of the world's biggest private equity firms is offering loans to buy-to-let landlords worth up to 20% of the value of the property, with no interest to pay. But on the sale of the property the lender takes a large chunk of the capital gain.
First-time buyers though, can wave goodbye to the chance of obtaining a free loan as the lender, Castle Trust, has designed the product to help landlords expand their portfolios.
For every 1% of the value of a property that it lends against, Castle Trust will take 2% of the profit when it comes to sell. But for the life of the loan – from one to 10 years, the landlord does not pay a penny in interest.
For example, let's say a landlord buys a house for £220,000 and takes a loan worth 10% (£22,000) from Castle Trust. Five years later, he sells the property and it fetches £238,000. The landlord has to repay the amount borrowed – £22,000 – plus a 20% share in the profit, which would be £3,600 (20% of £18,000). So in total he repays £25,600 – but during those five years has not paid any interest on the loan.
Castle Trust says the deal is "perfect" for landlords who want to "grow their portfolio quickly and efficiently". It tells financial advisers – who receive a 1% cut of the loan arranged – that "it will particularly suit clients who want to accelerate the growth of their portfolios". It does add that if house prices rise substantially, it may cost the client more than a traditional mortgage. In the example above, if the house sold for £400,000, then Castle Trust would take £58,000 having lent just £22,000.
Loans which take a share of the gain on sale have a chequered history in Britain. Bank of Scotland sold "shared appreciation mortgages" (Sams) to elderly clients which took 75% of the gain on a property but which prompted an outcry among families when they found their inheritance had disappeared. Guardian Money covered one case in which a loan of £54,500 turned into a repayment of £510,000.
Buy-to-let has rebounded strongly after loans all but disappeared during the financial crisis. In 2013 lenders gave landlords loans worth £20.7bn, a 32% increase on 2012. This compares to the £92.7bn, lent to first-time buyers, which was up 15% compared to 2012.
Castle Trust's deal will fan the controversy over lending to landlords. Campaign group Priced Out says it wants to end house price speculation, including measures to limit buy-to-let such as the end of mortgage tax relief on rental properties. This week it said Help to Buy has failed to assist first-timers, arguing that it has stimulated a buying frenzy that pushed property further out of the reach of those on moderate incomes.