What is the Intergenerational Mortgage?

Intergenerational mortgage may not be a term you are familiar with yet. However, this could be about to change. One mutual society that we know of is introducing a new type of loan that could help younger family members get onto the housing ladder for the first time. This loan is very different to any other similar home loan seen before. It aims to help families pass down assets (i.e. property) to younger generations. There is the bonus of possibly avoiding inheritance tax too or at least not paying as much as would otherwise be the case.

What is an intergenerational mortgage?

The clue is in the name. The idea is that elderly people will be able to get a mortgage to help their grandchildren (or children) buy a property. Those children or grandchildren may struggle to do so alone. Stalling wages and rising house prices have left many people viewing home ownership as nothing more than a pipe dream. Younger people face numerous challenges trying to get onto the housing ladder. While many parents and grandparents will leave their children an inheritance once they are gone, this could be too late in terms of helping younger relatives find the money they need to buy their own properties.

Properties owned by retired people are likely to be worth a lot of money nowadays too. If we compare the prices people bought these properties for to what they are worth now, there is often a stark difference. The equity available in such properties can be huge, even if there is still a sliver of the original loan left to pay. Traditionally, that equity would be released and divided among those mentioned in their will when older homeowners eventually die. However, many grandparents would like to help their grandchildren with their first property purchase. This is where the intergenerational mortgage comes in. The older homeowner will put up their own property as security on the purchase of another property for the younger family member. The scheme ensures that the person taking out the debt will be responsible for it, rather than the younger family member, who may otherwise struggle to get a home of their own.

Who are intergenerational mortgages for?

Only time will reveal whether this mortgage will be a success. It does appeal to a section of society who would like to help their children and/or grandchildren take their first step on the housing ladder. Many are property-rich and cash-poor, i.e. they would not be able to find the cash to contribute to a deposit, even though that money is locked up in the bricks and mortar of their home.

Their income may be enough to provide for their day-to-day needs, but it would not stretch to provide enough to help finance a home for their offspring or grandchildren. Some may also be short on savings to make this a possibility. Yet with their own mortgages either paid off in full or very close to being so, the equity in their property could amount to many thousands of pounds. This is a key point to note. Would those approaching retirement or who are already there be happy to take out a loan at this stage of their lives? Their property will act as security for the loan.

What are the risks?

If the child or grandchild defaults on their payments for their property, both properties could well be at risk. This would put the guarantors at serious risk of losing the home they had worked for and paid for throughout their lives. Could this be one risk too many for some? Some say you should never lend relatives money. This could lead to disaster if the finances are not paid back as agreed. Many a relationship has been ruined this way. The parent or grandparent willing to put up their property as collateral against a loan granted to a child or grandchild is putting a lot on the line not just financially, but personally.

Similarly, if the younger relative runs into problems and cannot meet their mortgage commitments, it leaves them worried about their relationship with the older family member. Both parties could be left without a roof over their heads and at a time when the older person is in retirement and looking to take it easy. Providing a cash loan or gift to a family member to help them make this purchase is one thing.

Providing their home as insurance against a default from the younger relative is quite another. Â Another plus point to put in the column for the intergenerational mortgage is the ability it gives people to plan their tax affairs more efficiently. In some scenarios, it could slash the amount of inheritance tax due on the estate of the person who puts their home up as security for the younger family member. Of course, no decision should be made without seeking the advice of an independent financial adviser. Few people like to talk about wills, estates, or what may happen after death.

Yet if different generations of the same family are considering the advantages of an intergenerational mortgage, it seems prudent to be upfront and to cover all the angles.

More from The Mortgage Broker Ltd

Darren Pescod, CEO of the Mortgage Broker Ltd, spoke of the need to defend the equity that has already been earned in the properties owned by many grandparents across the country.

“Clearly, lenders are aiming to try and improve the situation for younger people who cannot afford a mortgage of their own. It remains to be seen whether this type of loan will be a big success. However, there is little doubt it will at least fill a niche in the marketplace”

Published on 29 May 2016

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