Analysis: A 50-year-mortgage you pass down to your children, crazy or an idea to consider?

The Journal

2 days ago

FOR MANY HOMEOWNERS, the day they fully pay off their mortgage is likely one they dream about from the second they're handed their keys.
That feeling of accomplishment from successfully completing such a mammoth goal. The security from knowing that you fully own your own space, 100%.
Well, some UK financial advisors want to make some changes to that day.
The main one being that there's a decent chance the original house buyer would never experience it.
Instead, their children would be the ones to pay off the final part of the mortgage. This, of course, is referring to the concept of 'intergenerational mortgages'.
What the heck is that?
It's like a normal mortgage loan, with two key differences.
One – it has an ultra-long term – say 40 or 50 years. Currently in Ireland, somewhere around 25 or 30 years is more standard.
Two – the debt can be passed onto someone else, normally a family member.
So someone could take out an 'intergenerational mortgage' with a 50 year term when they're 40. If they die 40 years into the loan, their child could take over the mortgage and pay off the remaining 10 year balance.
Well, that sounds a bit bleak, doesn't it? Clearly, most people would rather pay off their mortgage while still alive.
For many, this could be so they can reap the rewards of their own hard work and enjoy being mortgage-free.
For others, they could be focused on helping their children to be more financially secure.
But in short – an intergenerational mortgage likely wouldn't be most people's first choice. And it's not a product Irish lenders offer. So why are we talking about it?
Affordability
Because there's been a recent push in the UK to sell intergenerational mortgages as a possible solution to the housing affordability crisis.
And based on the rising ages of Irish housebuyers, it's likely lenders here will also be interested.
The
FT Adviser carried a report
during the week with the headline: 'Intergenerational mortgages 'key' to tackling affordability.'
The piece was based on a conference organised by a communications consultancy which saw various smaller lenders pushing the idea that, well, intergenerational mortgages will help to tackle housing affordability.
What's their argument?
The basic idea pushed by these mortgage lenders is that by spreading repayments over such long periods, monthly mortgage costs fall. This then makes it 'makes home ownership more achievable for younger buyers', according to the brokers.
Now, obviously mortgage lenders want to sell more mortgage loans. So what they're saying could just be dismissed as a PR push from some niche lenders that few are taking seriously.
But that's not the case. In 2022, the UK government openly stated it was considering how to implement 50-year mortgages.
Former UK prime minister
Boris Johnson said the measure
could be a 'creative way to help people into ownership'.
While the new Labour government has not pursued the idea of intergenerational mortgages, the number of buyers taking out long term loans is rising quickly.
UK Finance, the lenders' trade body,
said last year that 22%
of loans taken out by first-time buyers were for 35 to 40 years. This compared to just 6% five years previously.
Longer term mortgages are also
being touted in the US
, while Australian lenders now also
offer 40 year mortgages
.
The move is in response to older housebuyers. As house prices and rents rise, it takes longer for people to get in a position to take out a mortgage.
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Ireland also faces a similar shift –
the median age of housebuyers rose
from 35 in 2010 to 39 in 2021.
With people struggling to buy, lenders want to keep lending. How best to do that? You tweak the terms so more people, specifically more older people, are eligible.
The numbers
Let's look at an example.
Say you're a first time buyer and want a house priced at €400,000. The deposit is 10%, or €40,000. So you need a mortgage of €360,000.
The average rate for new mortgages is currently around 3.7%, so say that's what your bank will lend.
Now we get to the term. If you take out a 30 year mortgage, your monthly repayments are about €1,650. But if you take out a 40 year term, the monthly repayment is just under €1,450.
So if it's cheaper, why doesn't everyone just go for a longer term?
Because it isn't cheaper – you just spread out the repayments over a longer period.
In fact, a 40 year mortgage is more expensive than a 30 year one. Why? Because you have 10 extra years of paying interest.
You pay back the principal of €360,000 in both cases. With a 30 year loan, you also pay about €237,000 in interest. But with a 40 year loan, you pay €330,000 in interest.
So while the 40 year option looks cheaper on the surface, you actually spend more money long term.
But it's good for lenders, as it lets people borrow more money for a 'lower' monthly repayment.
There's also a more fundamental issue with intergenerational or ultra long-term mortgages.
That problem is whether it will actually make housing more affordable at all.
It may of course make it possible for more people to get a mortgage and buy a home but all this does is help more people buy at current prices.
It does nothing to actually make properties more affordable in the long term – by increasing supply or reducing prices.
These products will likely just add more fuel to the fire and further drive up house prices.
But if it seems like a bad idea, and the Irish government hasn't suggested it yet, again we come back to – why are we talking about this?
Because it's a logical next step for Irish housing policy. As house prices have surged, the government's responses have mostly focused on helping people buy in at current prices.
Think of the Help to Buy or
Shared Equity schemes
. These initiatives are essentially ways of making it easier for people to borrow money to buy property.
The government spends hundreds of millions of euros a year on them – despite the fact that there's basically no evidence that they will make property more affordable in the long-term.
There's already been
mutterings of four person mortgages
, which is just another way for more people to borrow money.
If Irish property prices continue to rise, as they're predicted to, politicians and banks will need to work out ever-more creative ways to allow people to continue to buy.
As the idea of
reducing property prices is alien
to the Irish financial and political system, the only way people will be able to keep buying is if we find more inventive ways for them to borrow money.
The Irish government has repeatedly demonstrated it follows this line of thinking.
And the rising number of older borrowers suggests lenders will likely want to increasingly offer these longer term loans.
Intergenerational mortgages in Ireland might sound fanciful now.
But if housing affordability continues to worsen, don't be surprised if the idea is talked about much more seriously.
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