Building OnLadder: Ensuring Customer Fairness

In August 2020, the early days of OnLadder, we were still developing our proposition. We sought out experts in their field to obtain a better understanding of the requirements of the stakeholders in our business model. One of those stakeholders are the investors that would purchase the OnLadder deposit mortgage.

A friend of OnLadder recommended that we reach out to a property investor she knew who had recently spoken to entrepreneurs at a university event. This investor (who we will not be naming here!) had a successful history investing in property, capitalizing on the depressed valuations following the financial crisis and used this wealth to start new property centric companies.

He seemed an appropriate person to get feedback from on our proposition.

The meeting started pleasantly enough with both parties introducing each other and explaining our backgrounds. We then started to explain our product and were getting strong pushback from the investor on how we were structuring our product. He thought that we should be charging customers far more, using a type of mortgage called a Shared Appreciation Mortgage (SAM).

SAMs are deposit schemes that were intended to help a borrower to supplement their deposit. The deposit supplement is a fixed principal loan with the lender receiving a pro rata share of capital gains based on the percentage of the deposit the investor supplements. While these products were originally lent with the best of intentions, over time, this financial product proved to lead to unfair customer outcomes.

For example: a borrower purchases a £400,000 house at year 0. They contribute £20,000 from savings and £60,000 from a Shared Appreciation Mortgage. At the end of the term or on sale of the property, the Shared Appreciation Mortgage would be entitled to the loan’s principal of £60,000 and 75% of the property’s appreciation.

If the borrower sells the home 5 years later, and the home’s value has increased by 25% during that time, the repayment amount of the Shared Appreciation Mortgage would be £135,000: £60,000 from the initial investment in the home, and £75,000 based of the allotment of 75% of the home’s capital gains. More than double the initial contribution!

OnLadder works differently. In the same example as above, the OnLadder loan would provide 15% of the home’s value at year 0, and the percentage of the home at year 5 would be 20% and stop accruing equity then. This would then equate to proceeds of £100,000 upon sale of the property or through remortgage at year 5.

The OnLadder loan repayment would be £35,000 lower than what the borrower would have to repay if they went with a shared appreciation mortgage instead. The difference is clear.

Back to the conversation: we were trying to be respectful to the investor, but based on the history of SAMs and the numbers we were running, it wasn’t a model we felt comfortable implementing. Even when we made it clear we had reservations about the SAM model, the investor continued to press us on its veracity, leading to a heated exchange. This investor only saw it as a way to make money off young homebuyers who just want to get on the property ladder.

My co-founder Sam and I have strong feelings regarding customer fairness. All homebuyers should be properly protected, but first-time homebuyers especially so since they’re inexperienced, having never taken out a mortgage before. We want to get them on the property ladder responsibly, so they stay on the ladder, and that starts with good product design.