Til Death Us Do Part
Many people have enjoyed a little windfall on the death of their surviving parent but how would you feel if you were left their unpaid mortgage?
August this year saw the Kent Reliance Building Society launch the first 'inter-generational' mortgage in the UK, an interest-only loan whose capital sum remains unpaid until the death of the mortgagee. At that stage, their children must decide on whether to take on the mortgage themselves or sell the house and pay off the balance.
The KRBS has said that a homeowner could elect to take out an interest-only mortgage and pass the repayments and house on to the next generation when they die. The outstanding loan can also be passed on to the next generation as long as each beneficiary can meet the interest repayments.
Kent Reliance chief executive Mike Lazenby said in The Herald: "We are trying to break the mould and say to people 'It's your life, you make your own decisions and we will give you the opportunities. If you want a mortgage for 50 years, that's your choice, we'll help'. All we ask of our customers is that, from time to time, they review their circumstances to make sure the repayments are affordable."
But they would say that wouldn't they. There are huge profits to be made from selling an intergenerational mortgage - and the seemingly endless stream of interest-only payments.
The new mortgage would probably cut tax for many because the building society would still own a large slice of the home when it came time to calculate the inheritance tax owed. But the corollary to this is that the beneficiary would be left with a large mortgage because the homeowner only paid off interest rather than the loan itself.
Some Urge Caution
Property experts have urged caution, however, as the mortgages would mean people would have to continue making interest payments throughout their retirement, which could prove an expensive option.
Some personal finance experts have given a cautious welcome to the innovative mortgage. Others have pointed out potential flaws. Some believe leaving the debt for your children is somehow selfish, while others express caution that if property prices or interest rates do not rise, it could prove financially disastrous.
Others point out that, culturally, the UK is very different from countries where these mortgages are more common, such as Italy, where there tends to be a more stable family home and where it is common for people to live with their parents to a much older age.
The Council of Mortgage Lenders (CML) said the mortgage gives homeowners more choice, but warned that children inheriting a mortgage needed to be aware of its financial implications. Children (who may be retired themselves at the death of their parents) are not likely to want additional debt from their parents, even with a property attached. It's also possible that this style of lending is feeding an unhealthy attitude to debt by setting a dangerous precedent, which says that living with big debts over long periods is acceptable.
One commentator has noted that intergenerational mortgages were introduced in Japan during the 1980s and helped to keep their economy afloat. It was a prelude to years of economic stagnation.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The overall cost for comparison is 7.1% APR. The actual rate available will depend upon your circumstances. Ask for a personalised illustration. There may be a fee for the mortgage advice. The precise amount will depend on your circumstances, but we estimate it will be 1.5% of the loan amount with a minimum fee of £500 added on to the loan.
Mayfair Consulting Limited is an Appointed Representative of The Mortgage Times Group Limited, 279 Tottenham Court Road, London , W1T 7RJ , which is authorised and regulated by the Financial Services Authority no. 303007.
