A third of Britons rely on inheritance to fund mortgage

02 June 2008 / by Daniela Gieseler
One in three Britons say they could only afford to buy a home or pay off their mortgage if they inherited money, a new study from Engage Mutual Assurance revealed.

Of the 2,000 people surveyed, 11 per cent said they could not afford to get on the property ladder without an inheritance and a further 23 per cent said they were not able to pay off their mortgage without a windfall from their relatives.

According to the Council of Mortgage Lenders (CML), the study “could have some truth in it”.

The CML's own research shows that, with property prices soaring over the last five years, the number of people taking out interest-only mortgages without a dedicated repayment plan has also increased dramatically.

Since 2002, there has been a leap in interest-only mortgages from 9 per cent to 26 percent in 2007. For first time buyers, this figure has risen from 6 per cent to 20 per cent during the same period.

With an interest-only mortgage, borrowers only pay back the interest on the initial loan. They will have to make separate provisions for paying back the original amount borrowed.

Therefore, interest-only mortgages should be accompanied by another savings plan such as an endowment that builds up over time into a lump sum meant to pay off the borrowed amount in full.

By contrast, a repayment mortgage includes a repayment of interest and capital at the same time, and the outstanding mortgage loan will decrease over time.

Nick Breton from Engage Mutual Assurance commented: “It may be that people have interest-only mortgages and they're not saving, or their endowment isn't going to pay up. It reflects the fact that some people haven't been funding their mortgages properly."

The availability of easy credit in recent years has made 100 per cent mortgages and interest-only mortgages more accessible to people, many of whom might have put their hopes for paying the mortgage into an inheritance they might never receive.

A spokesperson for the Consumer Credit Counselling Service (CCCS) warned: “Relying on inheritance is not a good way to plan finances. You can't be sure of the amount you will receive."

He added: “People are living for longer. Pensions aren’t what they were – parents might need to use the inheritance money to live on. It's important for people to take responsibility for their own financial planning without waiting for money to fall from the sky.”

Whereas many people might have to bury their dreams of owning their own home, the banks are now forced to consider circumstances carefully before lending their money, the CCCS spokesperson said:

“In a way the crunch has solved the problem. It has forced lenders to take far more responsibility. The majority of mortgages now need a 25 to 35 per cent deposit. People have to think long and hard about whether they can afford to get on the property ladder.”

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