One bet on house prices you really don’t want to take

I’ve written here several times about the UK’s housing bubble. Until quite recently, it was deflating nicely in the north and getting there in real terms at least in the south. Not any more.

Prices are now rising almost everywhere – even in areas where prices were still not far off their old bubble levels. Why? You can put it down to rising buyer confidence if you like; but it is, as ever, more about the increasing availability of credit.

The weekend papers were full of the news that the banks have started offering new 95% mortgages in direct competition with Help to Buy (where the rates are relatively high), while the Mail on Sunday ran a story about the return of the long-life mortgage.

It turns out that “increasing numbers of borrowers” are asking for and getting loans with 30 or 35-year terms, and sometimes even with 40-year terms. The story suggests that this is a perfectly reasonable path for those who can’t meet their current payments; who are buying their first home; or who need money to do up (‘add value’) to their current home.

It might be. But to us it just looks like yet another way of changing the credit rules to allow people who can’t afford to buy houses to buy houses at the wrong price.

However, when I was looking at these twists and turns in the mortgage market, I also looked at the Castle Trust website. Here another old mortgage-market trick is on its way back – the shared appreciation mortgage, or ‘SAM’.

These were last sold back in the 1980s and 1990s before the great collapse in UK interest rates and the consequent massive bull market in house prices. I wrote about this here a few weeks ago.

I had thought that these were long gone, but their reappearance is interesting. Castle Trust must be assuming that house prices will keep rising or they wouldn’t bother providing them. But anyone who takes one out must be betting (or hoping) that house prices will stay flat or fall.

Look at the numbers. If your house holds its nominal value only, your borrowings will cost you nothing – though there will (of course!) be charges. Same if the price falls. But if it rises, the equation changes. £100,000 borrowed for ten years on a house worth £200,000 comes at an effective rate of 4.14% if the house price rises to £250,000 over ten years. Make that £350,000, and you will pay 9.6%. And if it doubles to £400,000? 11.62%. You can have your own scary fun with the calculator here.

I’m not exactly a property bull. But is taking out a SAM a bet I would make in an era where very high inflation remains a risk and government meddling remains a certainty? No way.