New “Inherited Mortgage” Launches

The Motley Fool, the BBC and Reuters are covering an interesting story about a new mortgage product that has been launched by Kent Reliance Building Society.

The “inherited mortgage” or “inter-generational mortgage” can be used to pass your mortgage debt onto your children when you die, and may also help when it comes to minimising inheritance tax.

This new mortgage is interest-only, meaning that the outstanding capital will never be paid back. When the initial mortgage holder dies, the debt can be passed onto a family member or a friend.

As you do not include debts in your estate when you die, this could help to reduce the inheritance tax bill.

One of the downsides is that as it is an interest-only mortgage, over a long period, you will end up paying far more interest than you would for a repayment mortgage, as this example from Reuters shows:

For example, a £200,000 loan on a 25-year repayment basis would cost around £350,754. At the end of the term, you would own the property outright. However, if you borrowed the same amount over 40 years on an interest-only basis, you would pay some £400,000 in interest and still owe the original £200,000.

Whilst the benefits of this new mortgage are questionable, I find it refreshing to see one of the smaller lenders trying to introduce something new to the mortgage market. These sorts of innovation in financial products might not always quite hit the mark, but they hopefully prompt some of the bigger companies to look at new ideas for their products.

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