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Never Ending Perpetual Mortgages

Richard Pettinger
 


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How do you like the idea of paying the minimum monthly mortgage payments possible on your mortgage? How do you like the idea of being able to pass both your mortgage and your house onto your children? It may seem rather far fetched but the latest type of mortgage to be offered is known as a perpetual or “never ending mortgage”. The idea is that you are able to make interest only payments, for an unspecified time period. If you die or are unable to keep making payments in retirement you can give the house and mortgage to your children. This means you never have to worry about paying capital repayments to try and pay off the mortgage capital. It is being offered by a small mortgage company called Kent Reliant Building society. They claim that this unique mortgage offer has been particularly popular.

The obvious drawback to such a mortgage is that you and your descendents will end up paying back a much larger share of interest to the bank. Usually a standard mortgage reduces the capital on which you pay interest. An interest only mortgage doesn’t actually reduce the debt you owe to the bank. Another problem inherent in such a mortgage scheme is that when you become an OAP and no longer have a wage coming in your pension may be insufficient to pay back the monthly mortgage charges. Furthermore although this schemes is attractive if house prices continue to rise. Many commentators argue that house prices are likely to plummet quite soon. It is worth remembering this happened in the early 1990s (15% in one year) it also occurred on a larger scale in the Japanese housing market. If house prices did fall you would have negative equity and would still have to make the monthly mortgage payments.

However having said all that there are reasons to suggest this new mortgage scheme is not as daft as it may sound. There are some good economic reasons for pursuing such a mortgage scheme. Firstly by passing the house and mortgage to your children you will avoid paying inheritance tax. However it is worth remembering in the UK the threshold for inheritance tax is £285,000 therefore this is only an issue if the mortgage is for more than this.

A stronger argument for a never-ending mortgage is that because house prices are so expensive this interest only scheme provides an opportunity for first time buyers to get a house. Without such an interest only scheme they would be unable to purchase and would be left renting which is not good from a financial perspective.

Finally this particular interest only mortgage means you don’t have to worry about an alternative investment scheme to pay off the debt by the end of the mortgage period.

If you are able to take on a repayment mortgage with no obvious financial hardship there is no reason to take on a never-ending mortgage scheme like this. If however your budget is stretched it could be a good option. It is quite likely such a scheme will become more popular. It is worth noting in Japan 100 year mortgages are already quite popular.

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R. Pettinger studied Politics and Economics at Oxford University. He now regularly writes on the UK economy and UK mortgages. He manages a site http://www.mortgageguideuk.co.uk/ which offeres a guide to of different types of UK mortgages

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