Don't fall for a 'last resort' mortgage

Amid all the talk of rising bankruptcies and irresponsible lending policies comes a mortgage that will allow homebuyers to borrow up to seven times their income in exchange for a chunk of any profits made when they sell their home. The Flexishare mortgage is the newest product from Advantage, the mortgage lending arm of investment bank Morgan Stanley. Buyers pay a higher-than-average interest rate on up to 80% of the purchase price. But the rest of the mortgage (between 15% and 35%) is made up of a "residential ownership loan", which charges a far lower interest rate. The bank takes a share of any gains equal to the proportion of the residential ownership loan, but also shares in any losses.

So is it a good idea? We don't think so. There are a few key problems. For one thing, the structure of the mortgage is just another way of encouraging people to borrow more money than they can really afford to spend on a house. Lax lending criteria are one of the main reasons for soaring house prices. So enabling people to spend even more money on property can only exacerbate the problem. As Edward Hadas points out on Breakingviews.com: "Shared appreciation mortgages can't actually make houses substantially more affordable for poorer potential buyers. True, they will be able to bid more because they can afford a bigger mortgage. But the only effect of making buyers feel richer will be to make house prices higher."

Another big snag is that even if house prices do continue to rise, borrowers have to share their gains with the lender. That means there's less money left for those who plan to trade up. Mortgage broker James Cotton of London & Country told The Times: "This deal is for borrowers who have exhausted all other avenues." Which begs the question if you are being forced to consider a last resort' option, then shouldn't you be considering saving up for longer and sticking with renting?

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