The Inherited Mortgage Arrives

Mortgages are usually restricted to a 25-year term. How do you fancy a low-cost mortgage that never ends?

"Your favourite building society now offers the mortgage that never ends". So reads the home page of the Kent Reliance Building Society, which has just announced that it will be offering interest-only mortgages that can be passed on to your heirs along with the home when you die.

Your heirs can then decide whether they want to deal with the mortgage themselves and keep the home or sell up, repay the mortgage and keep any leftover equity, assuming there is any at the time.

An added bonus is that as the mortgage is a debt, it's deducted from the value of your estate for Inheritance Tax purposes. So a £150,000 mortgage on a house that has increased in value to £400,000 by the time you die, would result in a tax-free £250,000 estate because it falls under the IHT threshold of (currently) £285,000.

Of course, although it would make a mortgage more affordable, it would be more expensive overall as you'd be paying a great deal more interest than you would with a repayment mortgage. Never paying off your mortgage, particularly during the likely low-income pensioner years, may not appeal to some people, particularly as the interest rate could fluctuate. One argument put forward, however, is to simply regard it as akin to renting except that you're the one entitled to any capital gain and are responsible for maintenance over the years rather than the landlord.

However, according to the society's chief executive, Mike Lazenby, the long-term mortgage will also apply to those who prefer a repayment mortgage. Which makes the idea a better one in my book - as long as you don't mind paying more interest over a much longer period, at any rate. Ultimately, the mortgage will eventually be paid off and you or your heirs will own the house. The mortgage rate in both cases can also be fixed, provisionally for the first 25 years.

Also, the longer the term, the more likely it is that the monthly repayments will reduce to almost the same amount as that of an interest-only mortgage. For example, a £100,000 mortgage @ 7% over 25 years will cost £583 interest-only or £706 for a repayment mortgage. But stretch the term to 50 years and while the interest-only cost remains the same, the repayment mortgage falls to £602 a month - a mere £19 a month more.

While the idea of passing debt down to the next generation may seem appalling on the face of it, Lazenby points out that ultimately all he's doing is offering a mortgage that is transferable to the next generation and that is not restricted to the traditional 25- year term.

Compare mortgages with the Fool's Mortgage Service.