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Can Pathway fix the broken housing ladder?

....with a mortgage-free route to home ownership

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Some startups do a small thing really well. Others take on the challenge of a HUGE problem.

And in the financial world, you don’t get much bigger than the broken housing ladder. Read on to find out how Pathway wants to help people “rent their way to ownership”.

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Pathway wants to fix the broken housing ladder

In summary:

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Buying a house in the UK is an impossible dream for many people under the age of 40. 

The idea of getting onto the housing ladder in your 20s used to be a rite of passage, and now even couples on decent salaries can struggle.

And while there is certainly room for the government to do more to alleviate the problem, entrepreneurs are addressing the need too. 

Pathway is a company that wants to make home buying as accessible as renting.

“We're on a mission to help people build wealth through homeownership,” says co-founder Ike Udechuku.

How it works

From a homebuyer’s perspective, the process Pathway plans to introduce would be just like renting. You would use the company’s mobile app or website to find somewhere you’d like to live, and state how much you can pay per month.

Assuming you pass the required financial checks, Pathway would offer you a contract that would let you move into the home, paying a fixed amount every month. Over the span of up to 40 years–the exact contract length depending on the market value of the house and the amount you can pay per month–the house would slowly become yours.

In the background, Pathway will buy the home outright and then gradually sell it to you through your monthly payments. 

“It's as if you own it,” says Udechuku. “Legally, we own it and we put it in a trust, and hold it for you and behave legally as if it is yours. And because it's in that trust for you, you have the same rights as any buyer.”

That also means you have the same responsibilities as a buyer. You have to pay for and arrange home maintenance yourself, for example. 

Pathway’s current website homepage

So how will Pathway fund buying all these homes outright, and how will it make money? The answer comes from the bond market. Pathway plans to sell bonds based on the revenue from homebuyers over the length of their contracts.

By pricing the bonds at higher than the market value of the properties they’re buying, Pathway can fund home purchases and make money for itself upfront. 

And because homebuyers will be paying a monthly fee in line with local rental rates rather than mortgage prices, Pathway should bring in more than enough revenue to generate a significant long-term return for its bondholders.

“We intend use inflation-sensitive monthly contributions from homebuyers to create a new class of assets for life insurers and other institutions that pay monthly income to retirees,” Udechuku explains.

“Tapping retirement savings helps a younger generation achieve the goal of homeownership. At the same time, bonds based on local rental yields provide enhanced retirement income for an older generation and a commercial role for Pathway itself.”

Homebuyers won’t be locked into living in the home for the length of the contract, Udechuku says. If you want to move out, Pathway can sell the property and give you a share of the proceeds in keeping with the proportion of the funds you’ve paid towards its purchase value when you moved in. 

Because Pathway will be targeting the likes of pension funds and life insurers to buy its bonds, it creates an interesting intergenerational dynamic, Udechuku observes:

“We have a two-sided business in which we ask young people ‘are you willing to pay rent in exchange for ownership of the property?’, and ask an older generation of people selectively through the institutions holding their money, if they're willing to fund these homes in exchange for income. So it's an intergenerational transfer of wealth.”

Interestingly, Pathway’s model is very similar to an Islamic Musharakah mortgage. This is the second time at PreSeed Now we’ve seen a startup inspired by Islamic finance principles, which forbid interest payments. 

It’s something of a sign of the times that ideas many non-Muslims would view as quirky and unconventional are finding a new lease of life, as wealth becomes increasingly consolidated with a small portion of society. 

Pathway co-founder Ike Udechuku

The story so far

Udechuku has had a long career in the financial world, including stints at Morgan Stanley, Deutsche Bank, and Bank of America among others. 

Oh, and in an unusual twist, he and his wife turned their Brussels home into a design showroom a few years ago.

Udechuku’s career gave him a detailed understanding of the bond market, and how it could help transform housing.

“My background is really about looking at the big picture. To see past the thicket of details to the true underlying nature of the problem, and to bring corporate finance approaches to solving the problem.”

“For example, taking a portfolio of properties, and disaggregating them into the right to receive rents for decades, and the residual right to receive whatever's left over, the freehold, decades later. That's a very common corporate finance technique.”

This approach only works at scale though, so Udechuku’s task is to bring in investors who believe in the project to buy bonds and prove to the wider market of fund managers looking after billions of pounds, that this can work and the scale of returns is viable.

Alongside this, Udechuku’s team has built a first version of the tech platform that Pathway will operate on.  

Next steps

Udechuku says the next stage from a product point of view is to rebuild the platform from its current demonstrator status into something that can scale to handle thousands of customers. It needs to be able to track the progress of their contracts so they can easily see where they’re up to and manage their home buying process in a neobank-style user experience.

Meanwhile, the company is busy working towards selling the bonds they need to purchase homes.

He says Pathway is focused on the housing markets in Ipswich, Norwich, Leeds, and Hull to start with, as rental yields are particularly high in those areas.

Although it can’t house anyone yet, Pathway is building a waiting list (or ‘club’ in its parlance) of pre-screened customers who have shown they can afford their monthly payments.

“We’re saying ‘do you mind if we do the most invasive thing possible, which is to look at your actual bank records in advance?’,” says Udechuku. 

That's an unusual thing to do to be on a waiting list, but if we all come together, and all do that together, then we can go to these enormously conservative institutions [potential bond purchasers] and say, what else can we do to prove that they're individually good tenants?’”

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