Despite rising interest rates and stagnating or even falling sold property prices, the UK housing market remains more challenging than at almost any other time in living memory. As a result, buyers and lenders alike are continuing to look for new ways to facilitate purchases and make them more affordable to more people. One solution that is slowly gaining currency is that of the intergenerational mortgage.
What are intergenerational mortgages?
As the name implies, an intergenerational mortgage is a mortgage that is intended to help families pass down assets - in the form of property - from older generations to younger ones.
An intergenerational mortgage depends on an older family member, who's also a homeowner who has either paid off their own mortgage or has very substantial equity in their property. That person then puts up their property as security on a property purchase being made by a younger family member.
Clearly, intergenerational mortgages are intended to take advantage of years of rising sold property prices that have significantly boosted the on-paper values of many of the homes of people who bought them a long time ago. Without an intergenerational mortgage, although younger family members may ultimately have inherited the money realised from the sale of such properties, the equity may come too late to help them with their own property purchase. An intergenerational mortgage allows older relatives to help younger ones onto the ladder without having to sell their own home or opt for an equity release scheme.
Are there any other advantages of intergenerational mortgages?
Currently, an intergenerational mortgage may help reduce the amount of inheritance tax payable or avoid it altogether. This potential ability to help people plan their tax affairs is partly what sets an intergenerational mortgage apart from merely giving someone a cash lump sum to help them buy a property. And, of course, the other point to note is that even if someone has a property that's worth a lot of money, they won't necessarily have cash assets that they can gift or loan. An intergenerational mortgage gets around this problem thanks to its focus on property value.
Despite these obvious potential advantages, it's always worth remembering that inheritance tax is a tax that's consistently in governmental sights. As a result, it's prudent to take specialist tax and inheritance advice before committing to an intergenerational mortgage.
What about any potential disadvantages?
Responsibility for paying off the mortgage rests with the younger person who has purchased the mortgaged property. However, defaulting on repayments puts at risk not only their own mortgaged property but also the home of the older family member that was put up as security. Clearly, this would threaten the financial security of both parties, which could be a particular concern for an older person who is approaching retirement age or, indeed, already retired. It's also worth bearing in mind the potential interpersonal ramifications of defaulting on the mortgage. Even the strongest family relationships may be at risk in such a situation. As a result, an intergenerational mortgage is not something to take up without considerable thought and discussion on the part of everyone involved.
What's the take-up on intergenerational mortgages?
At the moment, the intergenerational mortgage is a relatively new product to the UK mortgage market. It's also a niche product that isn't yet offered by the majority of lenders. Unsurprisingly, therefore, there hasn't been much take-up. Indeed, it's still a concept that's unfamiliar to many people. With time, however, this may change. That said, it will be interesting to see how falling sold property prices impact mortgage applications. If - as is definitely not yet clear - house prices become relatively more affordable, the average buyer may need less help from family.
Is an intergenerational mortgage the same as a multigenerational mortgage?
No. Multigenerational mortgages are another niche product that are designed to facilitate the purchase of a property by multiple members of the same family from different generations. The incomes of all named parties are assessed for the purposes of the mortgage, and the lender will also look at the advisability of lending into the retirement of one or more of those parties. However, as multigenerational mortgages are a specialist product - at least at the moment - lenders that offer them are usually more flexible than in the mainstream mortgage market. For example, they are likely to consider not only salary and self-employed income but also commissions, bonuses, and unearned income, including pensions and rental income. Some lenders also maximise flexibility by ensuring that specialist experts underwrite each policy by hand.
What about 100-year mortgages? Are they a type of intergenerational mortgage?
No - and 100-year mortgages are not currently available on the UK mortgage market. To date, the longest mortgage term available in the UK has been 40 years - and this is unusual. So-called "100-year mortgages" are a product that mostly features in the Japanese mortgage market. Boris Johnson's government started considering the prospect of 50-year mortgages, but this is a baton that does not seem to have been taken up by the successive Conservative administrations. And with a general election in the offing, it's unlikely to find a place in Parliamentary time in the near future.
Only time will tell whether or not 100-year (or 50-year) mortgages will eventually make their way to the UK. Of course, if they do, it will be important to remember that although a longer mortgage term generally means lower monthly payments, it also usually means that a larger amount is repaid overall.
Currently in the UK, long mortgages are more common than shorter ones. Statistics from the Building Societies Association suggest that more than three times as many borrowers have taken out mortgages for between 30 and 35 years than have chosen one for less than 20 years.
For an overview of mortgage types currently available on the UK market, please explore https://www.cmmemortgages.com/mortgages-independents/mortgage-types/.
For general advice on all kinds of mortgages, make https://www.onedome.com/mortgages/mortgages-explained/ your first port of call. OneDome and CMME Mortgages are part of the same group, and OneDome is a referrer to CMME, which is authorised and regulated by the Financial Conduct Authority.
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