Now children can inherit mortgage

The "inter-generational mortgage" allows homeowners to take out an interest-only loan and pass on the house - and the repayments on it - when they die.

Such arrangements are common in other countries including Switzerland and Japan, but are going on sale in Britain for the first time this week as buyers look for new ways to help their children on to the property ladder.

But experts expressed concern that the loans would be misunderstood and could saddle future generations with unwanted debt.

Julia Harris, a mortgage expert with research organisation Moneywatch, said: "In our 'live for today' culture, the priority for many is to get on the property ladder and consumers and lenders are finding every way possible to make this happen.

"Although these [inter-generational mortgages] may be affordable in the short term, they are more expensive in the long run and could be lulling consumers into a false sense of security. The worry is whether lenders will act responsibly in giving out this money."

Kent Reliance Building Society said customers who took out its inter-generational mortgage could also choose to pass the mortgage on to a non-family member, such as a friend or even a colleague.

The child or nominated beneficiary would only have to make a decision about whether or not to take on the mortgage after the buyer had died. If necessary, the building society would sell the home to settle the outstanding debt.

The mortgage could also reduce the amount of money lost to the taxman, because inheritance tax is only levied on the wholly-owned part of the property. By increasing the level of an estate's debt, the amount of money subject to inheritance tax would fall.

The launch of the product came as a survey of first-time buyers published yesterday found many take it for granted that their parents will help them get on to the property ladder. One quarter of those looking to buy their first home expect their parents to give or lend them the money for a deposit, according to mortgage lender Abbey.

Andrew Montlake, of mortgage brokers Cobalt Capital, said there were "real issues of affordability" with interest-only mortgages. "The initial payments may be lower because only interest is being paid, but how are people going to afford these interest payments in retirement?

"You live in a property all your life, paying just the interest but leaving the debt. It strikes me as a little selfish."

The Financial Services Authority said it had noticed an increase in the number of interest-only mortgages for which the lender had not recorded any "investment vehicle" - a cash fund which would be used to pay in the future.

A spokeswoman said: "Our concern is that the implications of these products are explained and fully understood by consumers."

The debt that can save you a small fortune

PARENTS could take out an interest-only mortgage of 200,000 on a home worth 300,000. When they die, the mortgage and the house would pass to their children.

If the children did not want the mortgage, the debt could be settled by selling the house or be repaid by other means, such as an insurance policy or the sale of other assets. If they did agree, they continue to pay the monthly interest payments that their parents were paying before their death - and keep the house.

As a bonus, the family would avoid inheritance tax, because the wholly owned part of the property is only 100,000 - well short of the 285,000 threshold. Tax is not payable on the rest, because the children are inheriting debt rather than property.

Interest-only loans are very affordable - a typical mortgage of 115,000 would see monthly payments of 646.88, compared with 794.55 for a repayment mortgage. But they are more expensive in the long term because the interest payments do not decrease over time. With a conventional mortgage, the interest shrinks because the outstanding debt is also falling.