With house prices soaring, the Government has come up with a new idea to fix the housing market. They want to introduce 50 year-long intergenerational mortgages.
Rising house prices and increasing mortgage rates make it more difficult for people to afford to buy a house. And with renting now being no longer cheaper, first-time buyers find it difficult to get the required deposit for their first house.
And Boris Johnson’s Government is looking for solutions to fix the housing market and enable more people to buy their own home. Their answer, longer mortgages that are passed on to the next generation.
Intergenerational mortgages, that are passed on to your children, with the house, who will pay off the mortgage, are common in Japan. But would this work in the UK?
Could 50-Year Intergenerational Mortgages Work In The UK?
The Government’s argument is that longer mortgages will allow people to borrow more money without increased monthly payments.
We already have longer mortgages than the usual 20 to 25 years, with 37% of first-time buyers taking out 30 to 35-year mortgages, according to the Building Societies Association.
And some high street lenders even offer 40-year mortgages, such as Halifax, Santander and Nationwide. So it seems that the idea of ultra-long mortgages could work in the UK.
Mortgages with longer terms do come with issues though, as we have discussed in our news post 40-Year Mortgages – Home Or Retirement.
For example, with a 40-year mortgage, it is likely that homeowners have to pay off their mortgage in their retirement, which might prove difficult, if the pension is below the working income.
But the newly proposed mortgages would not only be super long, but they would also be intergenerational mortgages. This means that the house together with the remaining debt would be inherited by the children.
The End Of Downsizing?
One question would be if long intergenerational mortgages will be the end of down-sizing? Many people buy a big house to bring up their family and once the children have flown the nest, the parents buy a smaller, cheaper house.
With a 50-year mortgage, the parents would have to stay in their house until their death, when the house, including the mortgage, passes on to their children. And crucially, they would have to continue to pay the mortgage payments.
For many, downsizing is a way to pay off their mortgage to prevent them from having monthly payments once they have retired.
And the monthly payments need to be affordable for the children too. What if a child inherits their parent’s house and mortgage, but then struggles with paying the mortgage payments?
On the face of it, it seems like a great idea. But the problem remains that the loan would need to be affordable for all the original applicants and also the children who inherit it. Otherwise, the children could risk inheriting a liability they are unable to manage, which, when secured against your home, has catastrophic consequences.Graham Taylor, Managing Director at mortgage firm Hudson Rose
Another consideration is that while a longer-term mortgage will bring down monthly payments, it will at the same time increase the time that interest has to be paid. This will eventually mean that the house will be more expensive than with a shorter mortgage term, because you pay more in interest.
Driving Up Prices
There are also commentators that suggest that such long mortgages will drive up prices, which will make it even less affordable for people to buy their own home.
Allowing people to stretch further for longer would have the opposite effect of what younger people need; it would push house prices even higher, exacerbating our already dire problem.Lewis Shaw, Founder of Shaw Financial Services
If people have more money to spend, then they will fight harder over properties on the market, which will push up prices. Especially in a market with low housing stock.
Low Housing Stock
The main problem with the Government’s proposal is that it does not solve the actual problem. The reason why many people can’t afford to buy a house is not because they cannot afford a mortgage, but because the house prices are so high in relation to people’s incomes.
And the way to bring down house prices is to increase the housing stock. And this is what the Government should be focussing on. By making the planning process quicker and simpler and allowing more homes to be built, the supply issue could be addressed.
The industry has called on the Government for months to boost the housing supply.
Intergenerational mortgages will not solve the issue of a low housing stock. On the contrary, it could even exacerbate it, as it would drive up prices even more.
And it should also be mentioned that while in Japan 50-year and even 100-year intergenerational mortgages are available, the majority of mortgages taken out are for 30 years.