Intergenerational mortgages - pros and cons

Intergenerational mortgages have long been seen as a key route to unlocking the potential of the UK housing market. Effectively redistributing the equity and wealth ‘locked up’ in housing from one generation to another. Traditionally, intergenerational mortgages have come in the guise of guarantor mortgages and more recently the Bank of Mum & Dad supported buyers via gifted deposits. Both have their merits but also their restrictions. In recent years, several new lenders and initiatives have emerged that offer alternative ways for parents and indeed grandparents to assist their family. Barclays dipped their toe in the market with the introduction of the springboard mortgage, followed by the likes of the Family Building Society, both hinting at the future. However true innovation has come in the shape of new innovative lenders such as Generation Home with their unique ability to ‘boost’ relatives' incomes and deposits.

Intergenerational mortgages are not a new invention. A number of lenders currently allow more than two individuals on an application and some of these are more lenient on the maximum acceptable age at the end of the mortgage term. The difficulty is how a lender calculates the size of the loan when the income of the older family member is to be used. This is relatively straight forward if using a guaranteed income such as a final salary pension or an annuity. But with more people opting for drawdown in retirement it can pose a problem for lenders as to what level of income should be included. Furthermore, should the older applicant be working at the point of application but set to retire before the end of the mortgage term, a lender needs to be comfortable with the overall financial position post-retirement. This may lead to classifying the retiring individual as being financially dependant on the other mortgage holders which, in turn, could lead to a reduction in the loan size offered. So, in principle it is a good idea to offer more of these types of mortgages but there would need to be some regulatory and underwriting concessions to maximise the impact.

We are turning Japanese. A decade of ultra-low interest rates, followed by inter-generational mortgages which have been a feature of the Japanese mortgage market since the mid-90s. Low interest rates boost property prices, long mortgage terms then keep them going as the only way first time buyers can get on the ladder. It seems governments the world over will do anything to avoid the alternative of property prices actually falling!

Another smoke and mirror idea which will unlikely help the masses. Until more houses can be built quicker to kerb the supply and demand issue we have, the percentage of young people getting onto the housing ladder will keep reducing. The proposal of intergenerational mortgages is only going to benefit people with more affluent families that have high incomes or large assets in the first instance. Which they would likely end up helping their children get onto the housing ladder in other ways. Ultimately we don't see this being the answer to change the reducing percentage of young people getting onto the property ladder.

The concept of intergenerational mortgages is not new, in fact, it was possible to arrange a 100 year mortgage in the mid-00’s in Japan and when UK property prices reach new levels this idea is rolled out. There would be a great many challenges in bringing such a product to the market in todays regulatory frame work, although it could be argued that later life lending proves that a unlimited term mortgage concept is fundable. There would be issues around affordability over the term (which would span several income generations), concerns that this is interest only by another name and pricing to make the solution appealing, there would many other hurdles to overcome. I can see the Regulators taking a pretty closed view on the idea at present. That said, where there is demand and pockets deep enough and organisations patient enough nothing is impossible. However, what does a 100 year mortgage solve? My memory and understanding on Japanese product is vague and limited however, I believe the conclusion in Japan was that the product did nothing to dampen demand or value and it was seen as an inheritance planning tool for the wealthy. Also, most owner-occupied property changes hands within ten years. Offering a solution like this if taken up widely could restrict availability and simply increase demand further. This has happened with Buy to Let mortgages, especially the smaller properties that were once frequently sold as first-time buyers moved up the ladder, these are now held by the landlord. House prices are rising for a whole host or reasons and these need addressing. There is no magic bullet. We need to change our cultural association with property and see it as a basic right rather than an investment. Having security of tenure in a home forms an essential part of Maslow’s hierarchy of needs and to achieve that currently we need to own a property. So, perhaps one solution is to radically change tenants rights, increase tenancy terms so that contract measuring five years or more become the norm not those measured in months. Perhaps regulating rent reviews and improving the quality of tenanted property needs further legislation. Much of this is underway to some extent and one possible outcome of this is that investing in a property would be become less appealing and therefore there would more properties available to be owner-occupied. There are changes looming for landlords that will see investment into their “stock” to raise its efficiency ratings, this will bring further property to the market to be bought as homes. Of course, many landlords have also had to pay increased income tax which further hurts their pockets. Perhaps we need rules around new developments being sold with covenants that they must remain owner-occupied or sold to Housing Associations or similar so that they will remain “affordable”. None of these would be welcomed by developers or investors, but, this comes back to the idea that UK property is a rewarding investment rather than an essential need. in conclusion, looking at innovative funding solutions will potentially have limited impact, maybe actually continue to fan house price growth not deal with the underlying issues. We need to build more homes and restrict the buy to let market.

Intergenerational mortgages already exist if we define it as a mortgage which allows a parent or grandparent to help the younger generation to buy a property however they have slightly less catchy names and whilst useful they aren't suitable for everyone. The are not usually offered by high street lenders which is why it's important to speak with an adviser who understand the range of options available. Here are the ways that a we currently have intergenerational mortgages... Gifted deposits. Most lenders will allow a family member to gift them the deposit for their property. However the family member needs to have the liquid assets for this and they also have to agree that it's a true gift and can't be paid back. The young person taking the mortgage still needs to be able to afford the mortgage in their own right. Joint Borrower/ Sole proprieter. These mortgages are only offered by a handful of lenders but they allow the mortgage to be in joint names but the property ownership to be in sole names. This means that a family member could go on the mortgage to assist with affordability but would be able to avoid 2nd home ownership which can have implications for stamp duty and capital gains tax. The downside of these mortgages is that if that family member were to pass away then the loan might be unaffordable so I would always advise that life cover is taken if possible (depending on the age and medical history of the client it might not be). Also some lenders that offer this take the age of the oldest applicant into account and this might restrict the term we can put the mortgage over and potentially make this unaffordable. Family Assist mortgages. These come in many forms. Some allow family member to deposit savings with the building society for a period of time and that allows the building society to offer a higher risk mortgage such as a 95% mortgage. Some lenders take a charge of the property of the family member. These mortgage can in some cases offer better rates compared to a traditional 95% mortgage however doesn't really solve the problem and of the person buying the property still needing to afford the mortgage in their own right and also still needed to find 5% deposit which in some parts of the country can still be a significant amount. I feel that whilst I welcome any reform to the mortgage market that allows more people to buy their home I wonder if there is a way to support lenders to offer more of the options that we currently have.

Integenerational mortgages have been around for years. It's no coincidence the PM is bringing it up now. It's a further sign of how fearful the government is that house prices will soon fall, now the days of ultra-cheap credit are behind us. The recent decision to reduce the affordability stress test from +3% over the lender's reversion rate to just +1% was brought in for exactly the same reason. The whole economy is at the mercy of house prices, which are being propped up with one policy after another to support banks and house builders at the expense of everyone else. The British public are being taken for fools. The government needs to recognise the elephant in the room, that house prices are far too high, and this disastrous and disgraceful policy of artificially supporting them has to stop.

Intergenerational mortgages add a layer of complexity as most lenders have strict criteria on what age they will lend up to, which can be counterproductive if you have to reduce the term. For it to work properly lenders would need to follow in the footsteps of later life lenders like Livemore who take current and future income into account and don't restrict the term to retirement age.

I feel that Boris is coming at this from the wrong direction. It is not the mortgage market that is preventing people from becoming home owners; it is the cost of property in relation to peoples earnings. The issue isn't to find ways to help people take on more debt, we need to find ways to build more houses, in the areas people want and need to live.

I think intergenerational mortgages are on the rise again with new lenders hitting the market that specialise in these and getting first time buyers on the property ladder, Generation Homes are one of the main lenders that spring to mind here. I also think lenders are becoming more intuitive about how to improve these mortgages such as having the parents/grandparents input ringfenced in case of a breakup between their grandchild and their partner which I think gives the family much more confidence when agreeing to be part of these intergenerational mortgages. The most notable challenge I see are the lenders age restrictions especially those that an only lend up to the oldest applicants retirement age, not only does it massively shorten the term for the children/grandchildren therefore making monthly repayments more expensive and therefore less affordable. But it's also so unnecessary, who is even lucky enough these days to retire at state pension age!? Yes lenders do offer these, you have the more traditional lenders that offer joint borrower sole proprietor mortgages such as The Family Building society who have been an occupier in this space for a long while and then the new comers to the block with their deposit and affordability boosters such as Generation Homes. I like the new direction these intergenerational mortgages are going in and for those parents that want to help their children get on the property ladder without just giving them a handout I think it’s a really positive step forwards.