The loan you never repay

Raewyn and Dean Letfus want to help the poor in Fiji.

Just as people get used to a lifetime debt sentences with 50-year mortgages, out comes a new idea for cash-strapped house buyers: "deathbed mortgages".

An Auckland financier is promoting a new type of housing loan which might never be repaid and could be passed from one generation to another.

While other financiers eye the prospect of offering 50-year loans to help resolve the housing affordability crisis, executives at Greenlane-based Cairns Lockie are offering 10-year, interest-only mortgages.

If a homeowner was prepared to keep renewing the loan, these mortgages could be used to avoid ever repaying any principal. So a house - and its mortgage - could be passed from one generation to the next.

Borrowers "can in fact have a mortgage that never gets repaid", Cairns Lockie says on its website.

While interest-only loans are not new, until recently they have usually been short-term - typically for up to two or three years.

And in an unusual move, Cairns Lockie has also written one 20-year mortgage for an 85-year-old woman. No one expects her to live to 105 before she owns the house debt-free, says executive James Lockie. "It just suited her needs and she could afford the repayments."

If the interest-only loans take off, the spectre of today's young homeowners still paying mortgages well into their 80s might well become a reality.

Mr Lockie said the mortgages were attracting landlords rather than homeowners because the investors wanted to defer paying principal and keep spare cash free to buy more houses. They could also claim tax deductions for debt.

As Auckland's regional median house price climbs to $405,000, Mr Lockie expects more people to want different types of mortgages.

But the Consumers Institute's David Russell is concerned.

"It flies in the face of all advice that's been given whereby you pay off your mortgage as quickly as you can and start saving," he said. "This is just a soft option but an incredibly expensive and inter-generational option."

Hugh Pavletich, Christchurch-based co-author of the Demographia International Housing Affordability Survey, predicted such mortgages would become increasingly popular.

"As housing prices continue to escalate due to inadequate land supply, these desperate mortgage products will be seen as necessary," he said. "Sound and sensible mortgages can only flourish in sound property markets where housing affordability is achieved.

"It takes Aucklanders the equivalent of 6.6 years' full wage or salary to pay off a house but household mortgages should not be any more than 2 times a household's total annual income."

Problems had been growing for a long time as urban areas became more strangled and until land supply was opened up, housing would not become more affordable, he said.

British house buyers are being offered deathbed mortgages designed to be passed from one generation to the next, with only the interest paid.

They are saving up to $500 a month on repayments.

Borrowers can take out a 25-year interest-only loan and then extend it by another 25 years. When someone dies, they can pass it on to the next generation. But Mr Lockie said these loans were aimed at avoiding punitive death duties in Britain.

The idea of a 50-year mortgage for Kiwis emerged last month to help resolve the housing affordability crisis. The Commonwealth Bank and Westpac are considering 50-year mortgages and GE Money is offering 40-year loans in Australia.

Westpac said last month long-term mortgages sounded scarier than they were. The benefits were reduced monthly repayments, which meant people could buy more expensive houses.


Till death do us part

Monthly repayments on a $400,000 loan at 9.55 per cent: Interest-only, 10-year term: $3183.
Combined interest and principal, 10-year term: $5186.
Combined interest and principal, on a more usual 20-year term: $3741.
Source: Cairns Lockie


Borrowing big to help others

Dean Letfus of Pakuranga has a hoard of deathbed mortgages.

But he thinks of them as tools to help him fulfil a dream rather than a grim legacy for his kids. He and his wife, Raewyn, own 35 houses and flats in Auckland and Rotorua, many bought with interest-only loans.

"I'll roll these mortgages over until I die and my children will fight over the portfolio," said the investor, 44.

He has total borrowings of $6 million, of which $2 million is interest-only loans which he never intends to repay. Instead, he believes rising house prices will set him free from the wage-based workforce and he will be able to fulfil a philanthropic dream.

"Auckland house prices double in value about every 7.8 years so it doesn't matter whether my loans are interest-only or principal and interest combined," he said.

He expects his portfolio to be worth $100 million to $200 million by the time he dies and plans to leave the lot to his five children, now aged 9 to 21.

But his motivation is not to enrich the children or become a multi-millionaire. The Letfus family are Christians and plan to work with the poor in Fiji on health, education and community projects, funding their aid work from rental income on their properties.