The Daily Telegraph - Saturday - Money
The rise of the multi-generation mortgage
New, flexible loans let older borrowers share property wealth with their children, says Richard Dyson
The “Bank of Mum and Dad” – where parents give financial help to offspring – is being turned on its head in a new lending trend where middle-aged children are paying the mortgages taken out by their ageing parents.
It seems counterintuitive, but for a growing number of families it is a highly efficient way of allowing wealth to pass down a generation. It can also help cut inheritance tax liabilities.
The trend is being driven by the emergence of new, cheaper mortgage deals aimed specifically at older borrowers and where the interest can be paid each month.
This is a departure from traditional “equity release” or “lifetime mortgages” where interest is not paid monthly but instead rolls up for the life of the loan.
The latter can be ruinously expensive. A £200,000 “lifetime mortgage” at a typical rate of 5.5pc, taken out by a 65-year-old, could compound up to a total £599,000 debt by the time the borrower dies, for example, 20 years later aged 85.
By allowing the interest to be paid monthly, the new breed of mortgage avoids the corrosive, compounding effect of the debt.
And in many cases the interest payments are being made by children or grandchildren, whose wages can more comfortably cover the outgoings.
Insurance giant Legal & General, for example, offers a loan to home owners aged 60 and over at a rate of 4.32pc fixed for life. How much of your home’s value you can borrow is limited by your age: at age 70 the maximum is around 40pc, rising to 50pc at 80. With couples, the younger person’s age is used. In the first year of L&G’s mortgage, the interest cannot be paid. That is in effect a “fee” for L&G. But thereafter the interest payments can be covered by any family member and the capital loan can also be paid down by up
to 10pc per year. If monthly interest payments are stopped there is no problem – the loans simply revert to a roll-up basis where interest is compounded and cleared only at the death of the home owner.
At 4.32pc, the rate is also far lower than has traditionally been applied to open-ended or “lifetime” loans.
Adrian Anderson of broker Anderson Harris specialises in arranging loans for elderly, well-off borrowers, often as part of their estate planning. He said: “Using this type of borrowing in order to move wealth down the generations, or in order to cut an inheritance tax bill, wasn’t really feasible when the rates were at 6pc. Now it’s becoming more viable.”
Aviva is another provider allowing repayments on a similar basis for a lifetime fixed rate as low as 4.37pc, while OneFamily is offering an unusual deal for over-55s: a variable-rate lifetime mortgage currently charging 3pc. The rate is linked to inflation, so borrowers carry the risk of a rise in the cost of their debt.
OneFamily director Georgina Smith said versions of this deal allowing repayments would be offered shortly.
Smaller lenders such as Darlington Building Society or Family Building Society are also flexible about lending where borrowers are older, allowing more than one generation to share the benefits of property wealth.
Your Money readers Barry Wilson, 71, and his wife, Janice, 68, have recently secured a 13-year loan with Darlington in which their son Timothy, 41, is a joint property owner and also on the mortgage.
The Wilsons have pension income paid in dollars due to previous work in the United States. They had plenty of cash savings with which to buy a new home in Northampton, where the mortgage will be for 60pc of the price.
Tim benefits from the arrangement in that he gets part ownership of the property, and will also live there with his parents. The Wilsons benefit from his income, which Darlington needs in order to meet its lending criteria.
Mr Wilson said: “Our age, plus the fact our income was in another currency, was a problem. In general, coming from America, I’m surprised at how archaic and difficult the mortgage processes are in Britain.”