by Jenny Ruth
This third party "can be seriously disadvantaged if, for some reason, they have major difficulties at any stage with the repayments made to the primary borrower," Berry says.
The third party has no real protection an can lose a significant amount of equity if they default, he says.
With wrap mortgages, an investor buys a house using a mortgage. They then sell it to someone else with little or no deposit who pays a percentage point or two on top of the original interest rate, getting in exchange an agreement to take ownership in, say, 30 years time.
But if along the way the buyer defaults on repayments, the original owner keeps the title and any equity the buyer might have built up.
Berry says at least the third party can control whether they go into default, but the potential exists for the third party to be even more disadvantaged.
"They are even more at risk if the primary borrower (the vendor to the third party) defaults with the primary lender, as they do not have any rights with that primary lender. Therefore, whilst they might have paid all their payments to the primary borrower, if that primary borrower defaults with the primary lender, they again can potentially lose any equity they may have built up," Berry says.
Lenders rightly object to that lack of protection for the third party, even though they have no contractual relationship with such people, he says.
"A lender could suffer significant adverse publicity, if one of these deals went wrong." The third party is likely to go to the media to try to put pressure on the lender to help them out. "This is a no-win situation for a lender to be placed in and is rightly a situation they wish to avoid."
Broker lookinig for funds to wrap mortgages
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