A NEW mortgage product in which the capital loan may never be paid off was attacked yesterday for fostering a careless attitude to debt.

The interest-only loans, in which the repayment of capital can be deferred indefinitely, could result in children inheriting debt worth hundreds of thousands of pounds from their parents, mortgage experts said.

The mortgages also drew concern from experts that Kent Reliance Building Society could be exposing itself to claims of mis-selling from angry offspring in the future.

Malcolm Hurlston, chairman of the Consumer Credit Counselling Service, said: “This is a Louis XV loan. It is like parents saying ‘after me, the deluge’. It takes the idea of parents not leaving anything for their children a stage further — to leaving them with debt.”

Kent Reliance will grant the loans on an “inter-generational” basis. At present interest only loans are usually offered over a term of 25 years, at which point the borrower must repay the capital. With an inter-generational loan, the payment of capital could be deferred indefinitely.

This could allow borrowers or their children to choose to repay the full amount once house prices have gone up by enough to cover the debt. But fears have been raised that the loans will contribute to a culture of debt acceptance and may lead to the capital never being repaid.

Andrew Montlake, of Cobalt Capital, a mortgage broker, said: “This loan could lead to a ‘don’t care’ generation of parents who selfishly pass on large debts to their children. There is scope for mis-selling here, as the beneficiaries may not be happy that they are forced into a choice between taking on more debt or selling their parents’ property.”

Keith Tondeur, chairman of Credit Action, another debt advice service, said: “This is going too far. It sets a dangerous precedent and says that living with big debts over long periods is acceptable.”

The building society is also touting the idea as a way of eliminating inheritance tax liabilities, because inheritance tax is levied on estates above £285,000 after debts have been subtracted. A child inheriting a £400,000 home with a £150,000 mortgage would theoretically not pay inheritance tax because the value of the estate passed on would be £250,000.

But borrowers will be paying over the odds in interest. For example, capital and interest repayments on a £200,000 loan would cost about £350,000. The borrower would then be debt free. But repaying the same amount over 40 years on an interest-only basis would mean interest payments of £400,000, after which the original £200,000 would still be outstanding.

In the face of sky high house prices, banks and building societies have come under increasing pressure to improve the flexibility of deals to make property more affordable. But question marks remain over many of the solutions that have been offered so far.

The Financial Services Authority is already investigating interest-only loans, amid concern that an increasing number of overstretched borrowers are choosing the deals to keep their monthly repayments low, but cannot afford to repay the capital.

The Treasury said that it would keep the new loans under review as part of its commitment to a fair tax system.

How it works

• Borrower agrees normal mortgage over 25-year term on any Kent Reliance deal
  
  
• Option to extend the term every five years, subject to affordability
  
  
• At any time the borrower wants, the property and the mortgage can be transferred to a child
  
  
• Beneficiary affordability will be assessed separately
  
  
• If the beneficiary cannot afford or does not want to repay the mortgage, the debt can be cleared by selling the house
  
  
• Borrowers can choose to make capital repayments at any time if they wish