Are intergenerational mortgages the key to tackling affordability?

A greater willingness to lend into retirement and the adoption of intergenerational mortgages will be key to tackling the UK’s affordability crisis, according to industry leaders.

Speaking recently at a roundtable on the future of the mortgage market hosted by communications consultancy MRM, participants urged the market to think outside the box to help more people onto the property ladder.

One of the key ideas raised was the introduction of Japanese-style intergenerational mortgages that are designed to span multiple generations.

With this model, borrowers take out ultra-long-term mortgages – often 50 years or more – with the expectation that their children will inherit both the property and the remaining debt.

By spreading repayments over such long periods, monthly costs fall significantly, making home ownership more achievable for younger buyers.

In 2000, the average home in England cost around four times the average salary. Today, it’s nearly double that, according to the Office for National Statistics – underlining the need for innovative solutions.

John Davison, head of product, proposition and distribution at long-term mortgage lender Perenna, said: “The longer-term mortgage idea is very new in the UK, whereas other countries have intergenerational mortgages left as part of people’s estates.

“We have a cultural belief that we must pay off all our debt before we die and pass on our property mortgage-free to our children – but I’d rather my parents enjoyed their money and I’ll pay off the remaining mortgage from the property sale when they’re gone. There could be a shift in thinking coming for the new generation.”

While many lenders allow borrowers to carry their mortgage into retirement, most have maximum age caps where the loan must be repaid. This is typically 75-80 years old with mainstream lenders.

Claire Cherrington, director of PMS and Bankhall at Sesame Bankhall Group, said one solution that could be preferable to renting for some borrowers would be for lenders to increase their upper age limits, allowing the debt to be repaid by the borrower’s estate upon death.

She said: “While later life borrowing may not be the ideal solution for the majority, it could provide a practical solution for those who haven’t amassed equity by retirement. For these people, it could make sense to continue paying a mortgage in retirement instead of renting, especially if you've got a pension that covers it and you can afford it.

“We need to think differently to tackle this and help broader society, as house prices won’t significantly fall or incomes significantly rise faster than inflation, so the affordability challenge remains.

“But for those generations who are renting and can’t afford to get on the property ladder, looking at different term lengths and structures could give them a chance to avoid renting into retirement and to build wealth.

“There are, however, still constraints in current regulations that prevent us from thinking differently about how to tackle some of those problems.”

While the current state pension age is 66, that is set to rise to 68 in 2044. However, last year the International Longevity Centre suggested that anyone born after April 1970 may have to wait until they were 71 to claim the state pension.

As a result, lenders will be forced to adapt to changing working patters, according to Tanya Elmaz, director of intermediary sales at Together.

She added: “We already have slightly longer terms for our residential mortgages, but we've got an aging population so it doesn't matter what type of lender you are, you cannot have your eyes closed to the fact that we're going to be working for longer.

“Retirement ages keep moving, so by the time some of us retire we might be a bit older, as we're working longer. So, lenders will need to meet the needs of older customers as well as younger ones in future.”