It is four years since the Kent Reliance Building Society became the first UK mortgage lender to introduce the death bed mortgage. This original name was decided against and the product was launched as the inter-generational mortgage instead. It represents the best of all worlds to the mortgage lender as could literally bring in interest payments for generations. However those who opt for it leave their heirs their debt, which is not everyone’s idea of a dream inheritance.
The idea behind this product originated from the Japanese version of the mortgage. The house buyer takes a mortgage which has no set repayment date and pays interest only on the mortgage, thus never reducing the capital loan. This is handy for those who cannot afford to pay more than just interest on their mortgage, and if the property appreciates in value then the mortgage will of course represent a smaller portion of the outstanding capital.
When the homeowner dies the property and the mortgage debt is left to the children. They then have the option of taking over the mortgage interest payments or of selling the property and repaying the building society. As they actually inherit a property which is not paid for but has a serviceable debt, their inheritance tax liability is reduced.
Naturally there are many issues which arise from the inter-generational mortgage. The homeowner could end up paying interest which amounts to much more than they would have paid by actually taking out a capital repayment mortgage in the first place, depending on how many years the homeowner lives. They will benefit from lower monthly repayments whilst living in the property, in some areas less than the cost of renting, but they will end up still owing the interest payments in retirement which could be very problematic.
Not many adult children remain in the parental home until the parent’s death, but those who do could well end up being pensioners themselves by the time they inherit. If they can’t afford the mortgage interest payments then they will be obliged to sell the home they live in to repay the debt. If they don’t live in the parental home they will either need to assume the interest payments or sell the property and clear the debt within 12 months.
The inter-generational mortgage is portable and would only appear to benefit those who buy a large family house which appreciates considerably in value, with the intention of downsizing upon retirement. Originally the product was launched as an interest only mortgage but now the Kent allows homeowners to switch at any time to a capital repayment vehicle without a fee.
The concept goes against the grain of all sensible financial decisions and amounts to paying rent for life on a property still owned by the building society. Retirement is not the time to be still paying a mortgage, and it is easily possible for the mortgage to run to 40, 50, 60 years and beyond, thus lining the building society pockets with a massive interest return.