Buyers struggle with mortgage approvals

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STARTLING new figures show that around 16 per cent of mortgage applications across Yorkshire and the Humber were rejected over the last five years – and the national picture is even worse.

The rejected mortgage applications for the region were worth £27.3bn, compared to a national figure of £227bn, representing 1.57m people being turned down for an average of £144,600.

The figures come from Castle Trust, which describes itself as “a new kind of financial institution” and began offering products to the public on October 1, two years after it was established.

CEO Sean Oldfield said: “I think the number in Yorkshire and the Humber is probably even lower than the national average because of the strength of the building societies in the region.

“The other thing is the number masks probably a very large pool of people who probably didn’t even want to go and get one through fear of being rejected.”

If anything, it could become more difficult to secure a mortgage in the coming years because banks have to hold more in capital reserves. Castle Trust’s research shows that 71 per cent of IFAs expect the amount that banks are willing to lend will be lower than historical levels, while 72 per cent expect mortgage rates to increase over the next five years.

What makes Castle Trust different, according to Mr Oldfield, is that it tries to reduce the risk for people buying a home.

Its partnership mortgage means that people need just 60 per cent of the value of the property from a traditional lender. The other 40 per cent will be split equally: half is a deposit which the buyer needs to provide, and half is an investment through Castle Trust.

If the value of the home has dropped when it comes to be sold, Castle Trust takes a 20 per cent share of the loss. If the house price has risen, Castle Trust takes a 40 per cent share.

The result is that the homeowner is either protected from the worst of any decrease in value, or gets to keep 60 per cent of any increase.

Because the buyer needs a smaller mortgage in the first place, the monthly payments can be significantly lower, which gives a cushion against any rise in interest rates over the coming years. For investors, there is also an advantage to putting money – anything from £1,000 to £1m – into the scheme.

It appeals to potential buy-to-let investors who are more insulated from the risks of the housing market and who don’t have to deal with tenants and issues of maintenance and repair.

Equally, first-time buyers can invest in the scheme and, unlike a savings account, the money they get out at the end of their three, five or 10-year deal will reflect the way the housing market has changed during that time.

“If you are thinking about saving for a home, if you put your money with a bank and house prices rise, you are falling off the ladder,” said Mr Oldfield

“First-time buyers often struggle to pull the money together for a deposit, so it’s probably particularly useful for the bank of mum and dad to be prepared for what can happen in the future.”

Being ready for the ups and downs of the housing market is a key part of Castle Trust’s approach, aiming to address some of the biggest challenges faced by both homeowners and invest- ors.

“We think our partnership mortgage is a good ‘boy scout’ product, because it helps you to be prepared,” said Mr Oldfield.

Fundamentally, Mr Oldfield believes a home should be seen as just that, rather than a way to make quick money. This is particularly important, he said, when you consider that buying a home is usually the only time in a person’s life when they invest almost everything they have in one place – something which nobody would advise anyone to do with any other kind of investment.

“I think it’s the worst financial decision everyone makes in terms of risk, and most people don’t appreciate how big the financial risk is,” he said. That risk has become clearer over the last few years, however, as the housing market has stopped rising and values have dropped.

“What many people forgot between 1995 and 2007 was owning a home can be risky and house prices can go down,” he added.

“When they did, people started to remember about the rest of what owning a home means. It’s not just a roof over your head – it’s where you put most of your wealth.”