Some have argued the announcement of potential 50-year mortgages was mere distraction from an under-pressure Prime Minister searching for headline-grabbing policies, but does the proposal put forward by Boris Johnson have any actual merit? Will his successor inherit the policy idea and drive it forward, or will it be consigned to the dustbin of housing policy ideas that never see the light of day?
Let us take a closer look.
What are the plans?
At the beginning of the month, Downing Street revealed that it was looking at plans for 50-year mortgages that parents can pass down to their children – also known as ‘intergenerational mortgages’.
The report from The Times said that Boris Johnson was considering the prospect of encouraging long mortgages as a way to get more young people onto the housing ladder.
At present, a number of banks and lenders offer products that allow parents and grandparents to guarantee loans to adult children and grandchildren without big deposits, but the new plans would enable family homes AND their mortgages to be inherited.
It was the latest in a number of moves by the government and the outgoing Prime Minister to improve the chances of First Time Buyers, which has included more 95% mortgages and the First Homes scheme. But Johnson wanted banks to become even more creative with mortgage products, beyond the standard 25-year loan.
Various newspaper reports covered the would-be plans, which would include enabling longer mortgage periods that would let people borrow larger sums, with the possibility of passing the debt on.
While longer-term loans are nothing new – in Japan, for example, borrowers are offered 100-year family mortgages than can be passed on between generations – they are not commonplace in the UK.
The announcement wasn’t the first time that the idea of intergenerational mortgages had been mooted recently. Only last month, a group of mortgage advisers set out a range of reforms to reduce the barriers to home ownership for First Time Buyers.
Working with advisory network the Sesame Bankhall Group, the newly formed Industry Panel for Financial Advice published a white paper titled ‘Overcoming the challenges facing UK first-time buyers’ – which included a range of ideas that the industry should work on such as promoting alternatives to Help to Buy and the creation of intergenerational mortgages.
These intergenerational mortgages would link equity release or retirement interest-only (RIO) loans with a First Time Buyer mortgage for those parents who do not have the savings to gift a deposit.
“By linking equity release or a RIO deal with a First Time Buyer mortgage we can create one formal, intergenerational family mortgage where children pay mum and dad’s interest, protect their future inheritance and don’t place any financial burden on their parents,” the white paper claimed.
“The servicing of the interest payments could be built into the children’s’ affordability assessment.”
At the same time, the report did note that there would be ‘advice issues’ because the mortgage would sit across both the residential mortgage market the equity release sector. As such, it urged the Financial Conduct Authority to do more to support innovations such as this.
How did the industry react?
The proposals received a mixed reaction from the industry. Jeremy Leaf, north London estate agent and a former RICS residential chairman, told industry publication Estate Agent Today that any new concept aimed at growing the number of housing transactions and assisting aspiring First Time Buyers was welcome news.
However, he also put forward a word of caution: “The proposed 50-year mortgages are likely to extend the burden of debt down the generations and reduce income for many in retirement as well as almost certainly add to house price inflation and make it more difficult for future buyers to step on to the housing ladder.”
He added: “I believe the majority of our prospective purchasers would rather see any additional resources spent on easing lending criteria and help towards raising deposits which are generally cited as the most significant barriers to home ownership.”
Meanwhile, James Forrester, managing director of Barrows and Forrester, added: “Any measure that helps people into that elusive first rung of the housing ladder is gratefully received. But a word of caution, a 50-year term means higher income multiples are required to facilitate the larger loans that the Prime Minister has said he wants to encourage.”
Forrester added that if interest rates rise much further, these new larger loans will be less affordable and ‘we may end up with another 2008 on our hands’, so argued any scheme introduced must be done sensibly.
The reaction from mortgage brokers was more damning, with Imran Hussain, Director of Harmony Financial Services saying: “The government needs a proper plan to get more houses built rather than putting obstacles in the way and work with builders to encourage proper skilled labour to speed up construction. There should be a proper focus on building affordable housing now more than ever.”
Lewis Shaw, founder of Shaw Financial Services, slammed the idea as ‘so ludicrous that I can't quite believe it’s even being asked as a serious question’.
He said that enabling people to stretch further for longer would have the opposite effect of what younger people need. It would push house prices even higher, ‘exacerbating our already dire problem’.
Will 50-year mortgages become a thing?
In all likelihood, no. While Boris Johnson was said to be looking at the idea, he will only be Prime Minister for a few months longer and has already promised not to introduce any new policies until his successor takes over.
There is a chance that the new PM takes on this idea and runs with it, but there has been nothing said about 50-year mortgages from the final two candidates for Conservative Party leader, Rishi Sunak and Liz Truss. They will most likely have more pressing things to think about in the short-term than introducing a major new housing policy.
The idea is certainly one that warrants interest – and has its supporters – but it also has fierce critics and would need to be carefully thought through before being introduced.
Smaller-scale reforms of the mortgage market would appear to be more likely, while the new PM may look to introduce their own flagship housing policy to help the plight of First Time Buyers, following in the footsteps of David Cameron (Help to Buy), Theresa May (stamp duty removal for most first-time purchasers) and Boris Johnson (95% mortgages and First Homes).
The prospect of intergenerational 50-year mortgages can’t be written off completely, but the likelihood of this policy seeing the light of days seems much dimmer than most.