Mortgages - Ad infinitum

There are some exiting developments in the mortgage market with the birth of a new mortgage designed in order to allow home owners to pass on their mortgage debt in the event of their death. Whilst some people might think this is a rather odd thing to do, read on for the full story:

- The new inter-generational mortgage – surely to be known by something less tongue-twisting – is a product which has the promise of parents being able to pass on the mortgage debt on their home to their children, whilst considerably reducing the amount of inheritance tax paid on their estate.

The way in which this works is simple. Say, for example, the parent’s home is worth £250,000. The mortgage on this could be £150,000. Because this is an interest-only mortgage, the debt doesn’t reduce and the monthly repayments are purely interest. On the death of the parents, the house and its mortgage would pass on to their children. As there is a debt on the house, its value, excluding the mortgage, would only be £100,000 and this would be included in the parent’s estate as far as inheritance tax is concerned. Inheritance tax allowance rises annually. For the year 2006/7 this allowance is £285,000.

The children are then free to choose what they want to do with the property. If they decide to keep the home, maybe as a buy to let or for a family member to live in, then they continue with the mortgage, as there is no fixed time limit, unlike the situation with a normal mortgage. As long as the value of the house is more than the mortgage, then the children have still been left an asset of value.

Whilst the very thought of this type of loan is new to the UK, it’s already extremely popular in some other countries. The Japanese and Swiss have adopted the product with enthusiasm and neither of them are known for their lack of business acumen.

Where houses have risen in value over the past years, inheritance tax is proving a very real problem to people who would never have previously considered themselves wealthy enough to be in that tax bracket.

For older home owners, who might be finding their retirement years more expensive than they expected, they might find this mortgage useful. Borrowing on this basis would be at a much lower interest rate than the costs involved with equity release schemes and would release money to help the family during their own lifetime, rather than the tax man after it.

Interest only mortgages in themselves are not new, having grown from 18% to 30% of all mortgages in just two years. Prices of property are still rising faster than most young people can scrape together the deposit for a home and an interest only mortgage may be their only way to get that all-important first step on the home-ownership ladder.

Although the prospect of house prices actually falling, leaving people with negative equity in their homes, is always a possibility, over the medium term property has remained a stable investment. There seems to be no reason to doubt that this will continue. Monthly repayments are very much more affordable on an interest only basis, and you could save around £130 per month on a loan of £100,000, compared to a comparable repayment mortgage.

However, you must bear in mind that the original debt is not being tackled. Whilst the inheritance tax saving aspect is an interesting thought for older couples, maybe youngsters should consider the interest free loan as a step up on the ladder rather than a permanent ball and chain.

If all this is new to you, the easiest way to find out what’s on offer is via the internet. A broker will be up to date on what’s going on in the market and find out what’s right for you.