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Paralysed housing market requires a new model

by: Sean Oldfield
  • 15/11/2011
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Paralysed housing market requires a new model
One thing that we can all agree on is that the housing market is stagnant.

It is virtually paralysed by a triple whammy of lack of supply, historically high prices – with recent falls simply mirroring the impact of current employment prospects and disposable incomes – and tighter mortgage lending.

So I want to propose how we can reform the way we borrow and lend in a way that frees up the lending market, at a time when this is vitally important.

Imagine, if you will, a model in which a homebuyer borrows the same amount, but from two sources, as opposed to the traditional one. An example might be a 20% loan that was available to borrowers with a 20% deposit to go alongside a traditional repayment mortgage of 60%.

I believe this sort of product could kick-start mortgage lending once again.

Not through the product itself, but because it would enable those lenders offering the 60% repayment mortgage to offer nearly three times as many home loans.

How?

Well, banks hold several times as much capital for an 80% loan-to-value (LTV) mortgage as a 60% loan. Even at a conservative estimate of double the capital, huge swathes of a bank’s risk capital that is currently tied up with 80% LTV loans would be freed up for lending at 60%.

In addition, because banks would be lending 60% LTV instead of 80%, four mortgages could be available for every three previously.

Let’s look at the maths.

Based on, for example, a £200,000 home, an 80% LTV repayment mortgage would be £160,000. But at 60%, that repayment mortgage only needs to be £120,000.

For every three loans at £160,000 (ie a total of £480,000), lenders can offer four at £120,000 (ie. an increase of a third).

With a halving of the risk weighting of their loans, lenders would have another £480,000 available in this scenario for the same level of capital, meaning another four loans of £120,000 each.

So three loans turns into eight loans with this model – or 2.67 times as many borrowers.

Or, possibly more importantly, banks will have more money available to lend to businesses to get the economy moving, as well as their original £480,000 going to four homebuyers instead of just three. And this still leaves them able to strengthen their capital base.

Since the credit crunch started in 2008, banks have been caught between the need to repair their ailing balance sheets and calls to lend more to businesses and individuals to get the economy moving again.

These goals are normally somewhat contradictory; however, this model allows banks and building societies to do just that.

That’s why Castle Trust is planning to come to the market with a Partnership Mortgage, which is the 20% loan I’ve described above.

We believe it will benefit the economy, the banking system and the government, as well as helping homeowners to reduce their monthly mortgage payments.

Sean Oldfield is CEO of Castle Trust

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