Unmortgage: better than a mortgage?

Man climbing the housing ladder © iStock
A missing step, or a castle in the air?

Aspiring buyers struggling to get on to the property ladder might be tempted by a new product that says it will pay 95% of the purchase price of a house, says Holly Thomas in The Times. Unmortgage.com describes itself as “the missing step between renting and getting a mortgage”, helping people who would not have a large enough deposit or salary to get a mortgage for the property they want to buy.

Unmortgage requires buyers to put up 5% of the property value in cash, as well as 5% of the costs associated with buying, such as conveyancing and stamp duty. The company pays the rest, and will fund purchases up to ten times the buyer’s salary. The buyer then own 5% of their home and pays rent (or what the company calls “unrent”) on the rest of it.

The rent is calculated based on the value of the property and will increase in line with the retail price index (RPI), or 3% per year – whichever is greater. Unmortgage says that rental payments will always be less than what you would pay to rent conventionally in the same area. Buyers can buy more of the property from the firm over time, increasing their share of the equity and reducing the amount of rent they pay.

Unmortgage hopes to attract investment from pension funds, who like long-term inflation-linked income streams. But does this scheme make any sense for buyers? One obvious worry is security. Unmortgage tells The Times that it “would never remove someone from their home” as long as they keep up with payments, and says the “partnership agreement” between Unmortgage and the buyer would protect the buyer if Unmortgage closed.

Yet with a new concept like this, it’s difficult to be sure what might happen. Potential buyers would be wise to take independent legal advice on their position if Unmortgage were to go out of business, if relations between them and the firm were to sour, or if they simply wanted to sell up.

Government-backed schemes offer a more established route to shared ownership (see the MoneyAdviceService website for details). Lenders such as Bath Building Society and Market Harborough Building Society offer mortgages that take into account income buyers can get from renting out a room in deciding how much they’ll lend. But ultimately, if you’re struggling to afford a property on a conventional mortgage, it’s wiser to reassess your plans than rely on exotic products to stretch your budget further.

A radical way to unlock equity or a recipe for grief?

“Imagine having money in a safe that you are not allowed access [to]…That is what homeowners face every day with the wealth tied up in their homes.” So says Point, a US-based start-up that wants to make the process of accessing home equity “easier, faster and more fair”.

The firm doesn’t “loan money”, according to the explanation on its website – it buys “into your property as a partner”. Point usually offers potential customers between 5% and 15% of their home’s value.

Customers do not have to make repayments during the term of the deal (usually ten years) and if the property is worth the same amount by the end of the period, or decreases in value, Point doesn’t make any money – though the company appears to use a “risk-adjusted property value” and so may not share one-for-one in any losses, says Matt Levine on Bloomberg.com. However, if the property rises in value, the homeowner must pay Point some of the gains, with Point’s share being larger than its original investment.

Whether the idea is sensible for the homeowner depends on the terms of this, says Levine. “Selling 10% equity in your house at the market price seems like a no-brainer, while selling 20% equity at the price for 10% might require some more thought.” More broadly, while selling equity in one’s house is in one sense “a radical way of thinking about homeownership and how to utilise it to create financial opportunity”, says Gillian White in The Atlantic, it’s also yet “one more way of securitising the housing market, a practice which…has got the US economy in a bunch of trouble before” during the subprime crisis.

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