The UK government is considering plans for cross-generation mortgages to tackle the housing crisis but the idea was not welcomed by all in the mortgage sector with one describing the idea as “ludicrous”.
The new plans would see homeowners take out 50-year mortgage terms to be passed on to their children when they die.
While this style of mortgage has been introduced in other cultures, there are a lot of questions to be asked on how it would work in the UK.
When asked about the scheme, Prime Minister Boris Johnson said he was “certainly” considering cross-generation mortgages, according to a Sky News article.
Commenting on the plans: Altura Mortgage Finance managing director Rob Gill says: “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,” Gill adds.
Shaw Financial Services founder and mortgage expert Lewis Shaw says: “Another ludicrous idea from within Boris’ dream yurt which should be put on the pile-marked idiotic. I can’t quite believe it’s even been asked.”
“Joint-borrower-sole-proprietor mortgages have been around for years and allow a close family member to support mortgage affordability if a child is struggling to get the borrowing needed to buy a property. They’re not a fix to this.”
“We don’t need house prices to keep rising through more attempts to loan money. We don’t need any mortgage market reviews either. This is a dead cat at its best. The problems we have is that people’s wages aren’t rising at the same pace as the prices of goods and housing, and we’re not building enough properties to keep pace with demand. It’s that simple,” Shaw explains.
Speaking on if the idea of 50-year mortgage terms will solve the housing crisis alone, Private Finance technical director Chris Sykes comments: “On its own, no I don’t think so, there are still a finite number of houses so unless we build significantly more and perhaps also re-shuffle the ones we’ve got.”
Sykes says “so many questions come to mind”. He explains that it might allow more people to buy but suggests that it could send prices higher.
Looking at if it would help those that are unable to save for a deposit, Sykes says: “I’m assuming these won’t be 100% mortgages and if they are then could there be negative equity situations at a point being paid down very very slowly due to the long term.”
He also suggests that it could allow much higher income multiples, but it could also mean people overextend themselves.
In terms of generational debt, Sykes asks “would children want to take on the debt”.
“Does it assume children will live in that home for the term of the loan as well? If so, will children want their own space but then perhaps be lumbered with a mortgage payment on top of their own mortgage or rent. You also need to ask if it will affect a child’s ability to get their own mortgage,” he adds.
Last month, Boris Johnson announced new measures to support more people to get onto the property ladder, including a comprehensive review of the mortgage market.
The Prime Minister set out the government’s commitment to reversing declining homeownership rates.
He also confirmed his ambition to “unlock the opportunity of home ownership” for more people through Right to Buy.
Carl Summers Financial Services financial adviser Scott Taylor-Barr says: “I feel that Boris is coming at this from the wrong direction. It is not the mortgage market that is preventing people from becoming homeowners; it is the cost of property in relation to people’s 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.”
Dimora Mortgages director Jamie Lennox explains: “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.”
Last month, the secretary of state of levelling up, housing and communities Michael Gove said since the record high of 244,000 completions pre-pandemic there has since been “a number of economic headwinds which will make life more difficult” to reach the target of 300,000 new homes.
Gove said the target is still in place “but there are a number of factors that are going to make it and have made it more difficult”.
He highlighted the country’s “significant housing challenges” such as a historic lack of supply compared to the level of population growth.
According to data published by Unlatch last week, last year 181,810 new homes of the 300,000 target were completed across the UK, representing a shortfall of 118,190, which is the highest number since 2007.
Lennox adds: “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.”
SPF Private Clients chief executive Mark Harris says: “There has been a lot of noise but little detail so far. Intergenerational mortgages have been mooted in the past to help buyers.”
“It is not clear whether lenders have been consulted. Currently, they are required to assess the affordability of the debt over the term; if the children are to take over – how and what is to be assessed?”
“Spreading the debt over a longer term may just make the overall debt even more expensive. Will children want to inherit what they cannot afford? And should the UK market follow the Japanese example where house prices peaked in 1991 and still haven’t recovered to date – I am not sure there would be any volunteers for intergenerational mortgage prisoners.”
“Lenders already offer mortgage terms of up to 40 years, as well as various facilities such as joint borrower sole proprietor, guarantor, family-assisted schemes and 95 per cent mortgages. The Bank of Mum and Dad also already play a significant part in the housing journey for first-time buyers.”