The Gift that Keeps on Giving

In a seemingly “last ditched” attempt to provide loan products for desperate home buyers increasingly priced out of a historically inflated housing market, lenders in the UK are beginning to offer a loan nicknamed “the debt that never dies”.

This loan product, which is essentially an “interest only” loan that has NO amortization, would provide the borrower a premium rate in exchange for a lifetime of interest payments.

Furthermore, the loan is a form of “inter-generational” or “inheritable” debt in that can be (or possibly has to be) passed down to children or other heirs upon the death of the borrower.

Touted as having tax benefits by providing a means of transferring a home to heirs without incurring the full penalty of inheritance tax, it seems questionable at best to opt for a lifetime of interest payments and possibly an enormous headache for your children simply to avoid paying taxes.

Obviously, borrowers considering this loan would presume that home prices would increase enough, at some point, to allow them to sell the home in order to settle the debt if needed, but with home prices at historically high levels, that option seems open to question.

Furthermore, heirs who don’t want to take on the mortgage would also need to settle the loan either by selling the home (which, again, assumes the home sale would cover the loan) or by some other means.

Interestingly, this style of “inheritable mortgage” is nothing new. Apparently, it was a very popular loan option offered in Japan at the height of their speculative housing mania of the 1980’s.

Then, as now, buyers were doing anything they could to keep up with the demands of an increasingly unaffordable housing market fueled by hyper-optimistic speculative market behavior.

As we all know, Japan’s housing market collapsed in 1989 and declined for 16 consecutive years, showing only meager sings of life in 2006. There are, apparently, many heirs in Japan that have inherited and continue to inherit loans for homes that are worth dramatically less than their associated mortgage debt.

It will be interesting to see both how popular this loan option becomes in the UK as well as how long it will take for a similar product to be offered in the US.

Recently, lenders in the US began offering a 50 year fully amortizing loan product which, in effect, is very similar to the “inheritable mortgage” with the exception that it does actually amortize, allowing the borrower to pay down the principle, albeit at a very slow rate.

Many thanks go to PaperMoney reader Bert (posted in the comments section on this blog) for having shared this interesting development in the UK housing market.