exiting developments in the mortgage market with
the birth of a new mortgage designed in order to allow home
owners to pass on their mortgage debt in the event of their
death. Whilst some people might think this is a rather odd
thing to do, read on for the full story:-
The new inter-generational mortgage =96 surely to be known by
something less tongue-twisting =96 is a product which has the
promise of parents being able to pass on the mortgage debt on
their home to their children, whilst considerably reducing the
amount of inheritance tax paid on their estate.
The way in which this works is simple. Say, for example, the
parent’s home is worth =A3250,000. The mortgage on this could be
=A3150,000. Because this is an interest-only mortgage, the debt
doesn’t reduce and the monthly repayments are purely interest.
On the death of the parents, the house and its mortgage would
pass on to their children. As there is a debt on the house, its
value, excluding the mortgage, would only be =A3100,000 and this
would be included in the parent’s estate as far as inheritance
tax is concerned. Inheritance tax allowance rises annually. For
the year 2006/7 this allowance is =A3285,000.
The children are then free to choose what they want to do with
the property. If they decide to keep the home, maybe as a buy
to let or for a family member to live in, then they continue
with the mortgage, as there is no fixed time limit, unlike the
situation with a normal mortgage. As long as the value of the
house is more than the mortgage, then the children have still
been left an asset of value.
Whilst the very thought of this type of loan is new to the UK,
it’s already extremely popular in some other countries. The
Japanese and Swiss have adopted the product with enthusiasm and
neither of them are known for their lack of business acumen.
Where houses have risen in value over the past years,
inheritance tax is proving a very real problem to people who
would never have previously considered themselves wealthy
enough to be in that tax bracket.
For older home owners, who might be finding their retirement
years more expensive than they expected, they might find this
mortgage useful. Borrowing on this basis would be at a much
lower interest rate than the costs involved with equity release
schemes and would release money to help the family during their
own lifetime, rather than the tax man after it.
Interest only mortgages in themselves are not new, having grown
from 18% to 30% of all mortgages in just two years. Prices of
property are still rising faster than most young people can
scrape together the deposit for a home and an interest only
mortgage may be their only way to get that all-important first
step on the home-ownership ladder.
Although the prospect of house prices actually falling, leaving
people with negative equity in their homes, is always a
possibility, over the medium term property has remained a
stable investment. There seems to be no reason to doubt that
this will continue.
Monthly repayments are very much more affordable on an interest
only basis, and you could save around =A3130 per month on a loan
of =A3100,000, compared to a comparable repayment mortgage.
However, you must bear in mind that the original debt is not
being tackled. Whilst the inheritance tax saving aspect is an
interesting thought for older couples, maybe youngsters should
consider the interest free loan as a step up on the ladder
rather than a permanent ball and chain.
If all this is new to you, the easiest way to find out what’s
on offer is via the internet. A broker will be up to date on
what’s going on in the market and find out what’s right for
you.
About The Author: Visit scrouge mortgages to see how much the
old skinflit can save you on your mortgage
http://www.scrouge-online.co.uk/mortgages.php
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