The Perpetual Mortgage becomes a reality
The standard approach for a mortgage is a repayment mortgage for a fixed period of 25 years. During this time you would pay both interest and repayments to the capital amount owed. In recent years this 25 year mortgage has become increasingly difficult for people to afford. With house prices so high, monthly repayments on a repayment mortgage could be too expensive and unaffordable for the average first time buyer. As a consequence banks and building societies are offering longer term mortgage contracts of up to 30 or 40 years. In addition interest only mortgages are also becoming increasingly popular. However the FSA have raised concerns over the growth of interest only mortgages. They state that people who take on an interest only mortgage often do not have a scheme to pay the capital back at the end of the mortgage term.
One solution that has tentatively been presented is the idea of a perpetual or never ending mortgage. The idea is that you can pay interest only mortgage payments for an unlimited time period. This means that if you have not paid off the mortgage you can also leave the house and the mortgage to your children, if they wish. This means that the mortgage and house can be passed onto the next generation. The never ending mortgage is being offered by Kent Reliance Building Society. They say it is available on any of its interest only mortgage. Since its introduction they have received many prospective buyers, interested in such a mortgage.
Advantages of Perpetual Mortgages.
- You would avoid an inheritance tax bill. As you don’t own the house, you could pass it onto your children without paying any tax.
- The interest payments on an interest only mortgage will be less than a standard repayment mortgage. This makes it more affordable than the alternative, which is buying. It may also make better sense than renting.
- Gives people the choice to be able to live in a house they own (even if they still owe the bank the cost.
- Similar principle to 100 year mortgages which are available in Japan
- Children who take over ownership of the house could sell it at any time to pay off the debt.
- Over time the relative value of the interest repayments will diminish due to inflation. In the future it may be more possible to start paying capital repayments as well.
Disadvantages of Perpetual Mortgages.
- The cost over a life time is likely to be much higher. This is because the capital on which you pay interest is not diminishing like in an ordinary mortgage.
- There is no guarantee house prices will keep rising. For example in Japan house prices fell by 30% this would leave a lot of people with negative equity.