The new intergenerational mortgages: a family affair

The traditional 25 year mortgage could be a thing of the past, as a new breed of loan sets to enter the market. With the potential to pay an income later in life, help grandchildren buy their first home, or simply mitigate tax bills, this new loan has been devised by lenders for the older generation to help the young step on the property ladder.

One Family is set to provide the UK’s first intergenerational mortgage, which will allow grandparents to borrow in order to fund their grandchild’s first home, via loans that can be repaid further down the family line or allow other family members to pay interest or settle the debt.

With plans to launch over the next 3 months, the intergenerational mortgage scheme could prove hugely beneficial to the many young individuals currently unable to afford a starter home amid rising house prices. As the name suggests, it’s all about keeping it in the family.

The idea of helping parents pass wealth onto their children is not a new one, but has certainly been developing over recent months, with lenders such as Nationwide similarly extending its reach to families and younger borrowers. Nationwide is now planning to roll out a ‘safer’ range of equity release products with no access charges or penalties and no-negative-equity guarantee, meaning decent fixed interest rates without the risk of repossession.

Assisting the release of equity from asset rich homeowners is key and significantly affects a huge number of 60 to 80 year old homeowners, according to the Office of National Statistics. Figures have shown that today’s 60 somethings who paid an average £12,704 for their home in 1976, will now have seen investment raise to £292,000 with an annualised growth rate of 80%, reaching a very comfortable £3 million nest egg after 70 years on the property market if they reach their 90s. Long-term rising property prices have essentially caused many 50, 60 and 70 year olds – who bought their first homes in their early 20s – to build a very rewarding investment.

So is this the logical next step? With so many potentially sitting on lucrative investments, more lenders are expected to follow One Family’s lead in the current competitive market and allow homeowners to unlock the wealth tied into their properties, especially as pension schemes are set to become less generous.

This certainly signifies how many lenders are beginning to adopt a more holistic approach and provide opportunities to meet customer’s real requirements. An intergenerational wealth transfer is a positive step in the right direction: realising borrower’s genuine needs and allowing families to stay in their home as long as possible.

There are, however, a few things to bear in mind. Affordability is still a central consideration when applying for your mortgage, as you will need a certain amount of income to pay the mortgage regardless, and should still consider security later in life. However, this can also be a very beneficial option for buy to let investors, where mortgages are based on rental income rather than personal affordability.

Families increasingly face the decision of how best to defend the equity in family property, while also protecting young people struggling to start up their own home. Today’s youth expect not to put their foot on the ladder until at least their 30s, meanwhile, mounting property equity can leave grandparents’ with eye-watering inheritance tax bills.

Luckily, the mortgage market is changing and working hard to find solutions for every generation. Lenders have been extending their maximum lending age limits, increasing the amount of interest only options available and extending mortgage terms. Although house prices may show no sign of slowing yet, intergenerational mortgages are set to ease the pressure from both the ‘Bank of Mum and Dad’ and even Granny and Grandad.

If that wasn’t all, we are pleased to announce we have exclusive access to One Family’s new offer through St James’ Place and would be more than happy to make an introduction. If you have any questions regarding this or the mortgage market in general, please do not hesitate to contact us for more information.