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Written by rosalind renshaw

An extraordinary plan has emerged to revolutionise the mortgage market by bankrolling house buyers.

Aimed at both house movers and first-timers, it would give them a 20% deposit in return for a 40% share of any profits from an eventual sale.

It would also share any losses if house prices fell.

Behind the venture, Castle Trust, is Sir Callum McCarthy, a former chairman of the Financial Services Authority, and US private equity firm JC Flowers.

McCarthy chaired the FSA between September 2003 and September 2008, and at one stage was hauled before Parliament to defend the FSA’s handling of the Northern Rock crisis.

JC Flowers entered Britain’s financial services sector last year by investing in Kent Reliance Building Society and turning it into a bank. It has made clear its plans to do more deals.

McCarthy became European chairman of JC Flowers in November 2009.

Under the new plan,  Castle Trust would raise the money for the deposits by selling bonds to investors. Their returns would be dictated by the Halifax house price survey. Investors could take out stakes from £1,000.

While the business model has yet to gain approval from the FSA,  it would not need a full banking licence.

Castle Trust says its management team has “extensive investment and mortgage industry experience”.

McCarthy has recruited a heavyweight board, including John Gummer, now Lord Deben, who is chairman of the Association of Independent Financial Advisers. Dame Deirdre Hutton, a non-executive director of the Treasury and ex-chairman of the National Consumer Council, is also on the board.

McCarthy says that Castle Trust is structured in such a way that JC Flowers will make money regardless of whether house prices go up or down. JC Flowers has pumped £100m into the venture.

McCarthy said: “This is something genuinely innovative.

“There are thousands of people struggling to get on the housing ladder, or struggling to raise the deposit to move into a bigger house to cope with a growing family.

“Then there are people who want to invest in the housing market but don’t want to get caught up in the complications of a buy-to-let property.

“We’ve found a way to intermediate between those two groups of people, and that could become something quite powerful.

“It does sound too good to be true. We all had the same reaction when we looked at it. But we’ve spent two years modeling this.”


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    You wrote:
    "A £100,000 mortgage over 25 years with 3% inflation a year erodes the 'value' of that £100,000 down to a 'value' of £25,000 (£3,000 a year x 25 years). It's still a £100,000 debt but it's not worth what it was. "

    Imagine this ... you earn 25k a year and owe 100k. 25 years later you still earn 100k but the 3% inflation a year has caused the price of bread and milk to double. How has the price of bread and milk doubling over 25 years eroded the value of your debt? Expressed in 'bread and milk' terms, you may argue the value of the debt is only half what it was ... but that's only any use if you get paid in bread and milk. If the money you get paid in does not go up while the price of goods does - your debt is not diminished in any meaningful way.

    This is what has happened over the last 10 to 15 years. Globalization has meant that many people (not all, but certainly many people in semi-skilled and unskilled jobs - or jobs that have moved abroad) are earning no more now than they were 15 years ago. This is certainly true of all sorts of office/admin jobs. My local job centres are full of adverts for office/admin/clerical roles at 14k. They were paying 14k 20 years ago.

    During the debt boom years, a lot of people got higher salaries - working in sectors that had high demand because of the way the debt was spent.

    Those years are over - for at least a generation - maybe two.
    So, those 200k to 300k mortgages so carelessly taken on today, will still be worth the same (in general terms) in 25 years time.

    • 21 June 2011 12:58 PM
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    HPC blogger: One word sums up you superbly - pathetic. Your movement must be so proud to have you in their midst.

    That is if you ARE an HPCer in the first place...

    Industry Observer: Sir - your comments are appreciated. May we continue to enjoy lively debate for many moons...

    For the record, we only disagree on MOST things - but you're coming round slowly... ;o)

    • 20 June 2011 18:03 PM
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    FTB Dan (and Jules)

    If prices trebled say from £100K to £300K then they inflated by 200% (100% = £200K price and 200% = £300K price).

    But point is well made

    • 20 June 2011 15:47 PM
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    Jule dont argue with Mike Wilson hes alway right, yeah right!

    • 20 June 2011 15:38 PM
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    I think where you are going wrong is the assumption that there is only one flavour of inflation. That inflation affects all things equally. This is not true. In the ten year period to 2007 house prices tripled, or inflated 300%. This does not mean as a consequence that the wages of the people living in those houses saw their take home pay increase 300%.

    Likewise what we are getting now is the price of raw materials ranging from food to fuels inflating, we are seeing taxes inflate. BUT we are not seeing peoples take home pay increase.

    With your point about inflation eroding the debt what you are referring to is when people earning £8k a year buying a house for £30k 25 years ago, and now they earn £40k and the house is worth £300k, so a £30k mortgage set against either earnings or resale value is minimal.

    But what we are getting now is that people have bought a house and overpaid, the house is not inflating, their salary is not inflating, but their taxes and their living costs are. As a result each month they have less and less deposable income.

    • 20 June 2011 15:27 PM
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    I'm talking about how inflation erodes the value of money (and debt) - not paying off debt - that's something different.

    Inflation erodes debt, not by paying down the debt but by eroding the value of the debt.

    A £100,000 mortgage over 25 years with 3% inflation a year erodes the 'value' of that £100,000 down to a 'value' of £25,000 (£3,000 a year x 25 years). It's still a £100,000 debt but it's not worth what it was.

    Even if house prices don't go up, unlikely if inflation was at 3%, inflation has eroded the value of the debt which is pegged at todays value.

    • 20 June 2011 14:47 PM
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    You said: " Inflation at 5% still means the value of debts is being eroded by 5%. If your income is the same you can buy slightly less but if your debt is bigger the value of the erosion in greater."

    Nonsense I am afraid. You buy a house with a 100k interest only mortgage over 25 years during which inflation is 3%. Your salary does not rise during the period and it's buying power slightly more than halves. Because salaries are not going up, house prices do not go up either.

    So, at the end of 25 years you still owe 100k but is twice as hard to save any money to pay it off - and your house is still worth what it was 25 years ago.

    Wage inflation is what erodes debt, not price inflation. And, as someone else noted, in this age of globalization wages cannot simply rise along with prices as they did in the 1960s, 70s and 80s. No, that particular trick will not work until we have wage parity with the Far East / Africa and everyone inflates together.

    • 20 June 2011 13:38 PM
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    @HPC Blogger

    PeeBee historically is no best friend of mine but he talks as much sense as most on this forum and generally a lot more than many.

    If you want to read something useful in this forum read my responses on the agent warns of periodic tenancies article on June 7th and more importantly on the Sarah Rushbrrok one on fee charging dated I think Thursday?

    • 20 June 2011 13:27 PM
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    Inflation at 5% still means the value of debts is being eroded by 5%. If your income is the same you can buy slightly less but if your debt is bigger the value of the erosion in greater.

    • 20 June 2011 12:49 PM
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    'where is PeeBee?'

    Calling all bloggers. Has someone changed their name in order that they are not identified as PeeBee who admitted to being an ex estate agent but more importantly a cheat and con.

    • 20 June 2011 12:34 PM
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    Price inflation and wage inflation are not the same thing. At the moment we have lots of the former and little of the latter. This actually makes it harder to pay off debts, not easier.

    For inflation to rescue us from the current financial mess, salaries need to start rising sharply. This is unlikely to happen when British workers are competing with overseas workers for the same jobs on a level the UK economy has not experienced before.

    Besides which, the Bank of England has said wage inflation is the most likely reason they will raise interest rates, thus making it harder to pay off the debts.

    • 20 June 2011 12:11 PM
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    Inflation. We haven't had much for years - the uk didn't have any at all for hundreds of years - but in the 1970's inflation raged at 25% a year. A house in Gerrards Cross sold in 1968 for £12,000 (my dad's). It's worth £10m now. The morale of the story. In high inflation times put your money into property.

    • 20 June 2011 12:08 PM
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    I think Brown should be put on trial for the generational level of harm he did the UK. His reign was a disaster.

    But I'm pretty certain Hitler was worse. By a very good margin as well.

    • 20 June 2011 11:55 AM
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    Was Hitler worse than Gordon Brown?

    As we approach 2012 that will mean this financial war will have been picking up steam since late 2006 - Im making that six years so far.

    Oh not to mention the appalling loss of life in Iraq and Afghanistan with general economic churn contributing heavily to VAT income paying for it all.

    What an utter mess and political hot potatoe(y) the coliation have been left with? Sterling at what 20% less no wonder foreign investors are finding the UK so attractive ?

    Apologies if I have offended any one (well Germans anyway) I think thier chancellor probably had a better grip it on than the Brown / Blair clown show.

    • 20 June 2011 11:28 AM
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    @Mike Wilson

    You are right and the same problem befell the old Business Expansion Schemes (BES) which were in effect almost a licence to print money for higher rate taxpayers. Eventually the world's worst ever Chancellor (other than Hitler) Gordon Brown scrapped them I think in his 2000 budget.

    When prices fell and sharply the schemes couldn't pay out the investors their "guaranteed" returns and the schemes had to be renegotiated for an extended term beyond their original 5 year plan

    • 20 June 2011 10:42 AM
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    This just goes to show that there are a lot of people who still believe in the fairy tale of constantly rising house prices.

    Will there be an endless line of punters wanting to buy their bonds? I guess there will.

    So, you buy a bond and they GIVE the money to people and you get a return on your investment when the property price goes up and is sold. Where do I sign?

    • 20 June 2011 10:23 AM
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    I agree with every comment. I spent years involved with Shared Ownership scheme s and they were no solution and this is just the same by any other name.

    People will get trapped

    • 20 June 2011 09:54 AM
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    @rantnrave “Jules - So you're expecting interest rates to stay this low for the next 25 years?”

    Perhaps Greece will remain solvent and in the euro for another 25 years too.
    Perhaps global debt will be repaid in full within the next 25 years.
    Maybe governments will live within their means within 25 years.
    Perhaps there will be no inflation over the next 25 years.

    Global demand for capital is massive, yet global interest rates are set as if capital is not needed at all. Your question to Jules hits the nail on the head. Interest rates are going to soar!

    • 20 June 2011 09:54 AM
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    I hope that as few as possible honest, but naive, people will get burned by this. It’s obviously a disaster waiting to happen.

    It’s just saying that because inflation will be high over the next 15 years they want to stop someone from keeping pace in real terms. The poor people who suckered into this will be stuck in their little 1 bed flat for ever. We will have families of 4 or 5 living in a tiny house or flat. Pretty twisted!

    • 20 June 2011 09:46 AM
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    Jules - So you're expecting interest rates to stay this low for the next 25 years?

    • 20 June 2011 09:31 AM
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    Here's a thought. There's never been a better time to have a big mortgage. Low interest rates and high(er) inflation means you can afford the loan and inflation is paying it off. If only the bank had money to lend.

    • 20 June 2011 09:18 AM
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    What's the bet that there will be some Panorama style program in 10 years time on how both home buyers and investors lost out to this scam.

    • 20 June 2011 09:17 AM
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    I was worried until I read that they'll make money whether prices go up or down. I mean, what could possibly go wrong? I'm going to invest my entire pension in this sure-fire scheme.

    • 20 June 2011 08:18 AM
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    If you have to give back 40% ( nearly half ) of any profits in the future, how on earth could you ever move again, and if the house had to be sold at a loss, would they let you sell it ?

    • 20 June 2011 08:16 AM
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    RE "“It does sound too good to be true. "

    No it sounds a night mare to keep house prices artificially high, No surprise John Gummer has a buy to let portfolio.

    This will not help first time buyers.

    Why can't people just let the market work normally and self correct?

    I hope this scheme never gets off the ground

    • 20 June 2011 08:03 AM
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