Getting on the property ladder in today’s world can feel like an impossible dream for many young adults. Rising property prices, strict lending criteria, and the need for substantial deposits create a seemingly insurmountable hurdle.
It’s understandable, then, that parents and grandparents often want to help in any way they can.
One potential option for homeowners aged 55 and over is equity release. Equity release allows you to access some of the money tied up in your home.
This could potentially give you the resources to provide your children or grandchildren with financial assistance from the “Bank of Mum and Dad“, helping them make their homeownership aspirations a reality.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
What is Equity Release?
Equity release is a way for homeowners to unlock some of the value that has built up in their property over the years.
Think of it as a loan secured against your home.
For example, if you’ve owned your house for many years and its value has gone up significantly, equity release lets you access some of that increased value as a cash sum.
Equity release plans are only available to older homeowners, typically with a minimum age of 55.
There are two main types of equity release:
Lifetime Mortgages
This is the most common type of equity release.
You receive a cash lump sum, or regular income, from the lender. You don’t have to make any monthly repayments, and the interest rolls up over time.
The outstanding loan, plus accumulated interest, is eventually repaid when you pass away or move into long-term care.
Home Reversion Plans
With this type, you sell a portion or all of your home to a reversion company.
In exchange, you receive a cash lump sum or regular income. There are no monthly repayments.
Crucially, you retain a lifetime lease, giving you the right to live in your home rent-free for the rest of your life.
How much can you borrow?
How much you can borrow is mostly affected by your age, and the age of any joint borrowers. (You both have to be over 55)
Borrowing limits for Lifetime mortgages are expressed as a percentage of your property value. These start at around 20% and go up to around 55%.
What can you use the money for?
The beauty of equity release is that the money you unlock from your home is yours to use however you see fit, provided it’s legal.
Here are some common ways people use these funds:
Helping Children Onto the Property Ladder
As explored earlier, equity release can be a way to provide financial support to your children as they strive for homeownership. A gifted deposit or a lump sum can significantly improve their chances of securing a mortgage.
Home Improvements
Perhaps you’ve been dreaming of a home renovation or an extension. Equity release funds can make those dreams a reality, allowing you to create a more comfortable and enjoyable living space.
Debt Consolidation
High-interest debt can be a significant financial burden. Equity release can provide the resources to consolidate your debts and potentially secure a lower interest rate, simplifying your financial management.
Boosting Retirement Income
Equity release can offer a way to supplement your pension or other retirement income sources. This could provide greater financial security and flexibility in your golden years.
Improved Lifestyle
Equity release funds can be used to enhance your current lifestyle. Travel, hobbies, or even purchasing a second home for holidays are all possibilities.
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How Can Equity Release Help Your Child Purchase a Home?
Releasing some of the equity tied up in your property could open up ways to offer your child significant financial support as they strive towards owning their own home, or upsizing.
One of the biggest obstacles for first-time buyers is saving up a sizeable deposit.
By releasing equity from your home, you could provide your child with a gifted deposit, potentially transforming their ability to secure a mortgage.
This could make all the difference in helping them take that vital first step onto the property ladder.
Equity release gives you the opportunity to provide a portion of your inheritance while you’re still around to witness how it changes your child’s life. Seeing them achieve their homeownership dreams and establish financial security can be incredibly rewarding.
Help for students
It’s well known that studying at university is expensive, with both tuition fees and accommodation costs to be funded.
It’s certainly possible for you to help with the fees but what about the accommodation side of things?
How about buying a property for your child to live in while at university, and maybe renting out some rooms to generate an income.
This is what a student mortgage, or buy for uni mortgage, aims to do. It’s likely to need a cash deposit from you and you will also need to be part of the mortgage as a guarantor. But there are options available.
Key Factors to Consider
While equity release can be a great way to assist your child with their homeownership goals, it’s essential to be fully aware of the potential long-term implications.
Here are some factors to carefully consider:
Interest Rates and Roll-Up
With most lifetime mortgages, you don’t make monthly interest payments.
That means the interest compounds over time, increasing the overall amount you owe. This accumulation of interest (known as “roll-up”) can significantly impact the size of the loan over several years.
It’s important to get clear projections from your equity release adviser to understand how the interest will affect the final sum to be repaid.
Inheritance Implications
It’s essential to remember that releasing equity does reduce the value of your estate, which will affect any future inheritance you intend to leave behind.
Gifting a significant sum derived from equity release could also have potential inheritance tax (IHT) implications.
Generally, if you give the money away and live for at least seven years afterwards, it won’t be counted as part of your estate for IHT purposes. However, if you pass away within the seven-year period, inheritance tax might need to be paid on the gifted amount.
The rules surrounding IHT can be complex, so it’s absolutely essential to consult a qualified tax adviser to understand how it could affect your specific situation.
Alternatives
Equity release is one option, but depending on your family’s circumstances, there may be other avenues worth considering which don’t necessarily involve giving away cash.
Here’s a brief overview of a few potential alternatives:
Family Mortgages
Some lenders offer mortgages specifically geared towards helping families.
With these mortgages, parents typically provide a deposit (often held in a linked savings account for a few years) to boost their child’s borrowing power.
The mortgage is secured against the child’s property, not the parents’ home.
Guarantor Mortgages
If your child doesn’t have a large enough deposit or sufficient income to fully qualify for a mortgage, you may be able to act as a guarantor.
This means you agree to cover the mortgage payments if your child defaults on the loan. Your own home or savings usually serve as security for the lender.
The Importance of Professional Advice
Decisions relating to equity release are rarely simple.
They have far-reaching financial consequences for both you and your child, impacting your estate, potential inheritance, and your family’s financial well-being.
That’s why seeking tailored advice from a qualified professional is absolutely paramount.
You can only take out equity release through a qualified financial adviser. Not all financial advisers or mortgage advisers are authorised to give this advice.
In summary
Whether your dream is to help your children achieve their homeownership goals, make improvements to your own home, or enhance your retirement with increased financial flexibility, equity release could offer a solution.
Being asset rich and cash poor is a common occurrence, where your wealth is tied up in your home.
Equity release plans allow you to unlock that wealth.
One advantage of a lifetime mortgage is that you can use the money however you choose. And if you go for a drawdown option, you only take what you need, when you need it, which helps to keep the interest charges down.
Whatever type of equity release plan you might need, you will always need to first seek advice from a financial adviser who is qualified in equity release products.
If your aim is to generate a cash sum to help your children buy a house, then a mortgage broker can help them to find the best deal. Your cash gift is labelled as a ‘gifted deposit‘ by lenders.
This means that certain formalities need to be put in place before any mortgage can be agreed.
Don’t worry though, your adviser can explain how this works.
To learn more about lifetime mortgages and equity release visit our Equity Release Hub where you will find a wealth of guides and articles.
Our article What is a gifted deposit? explains the rules of gifting money for a house purchase and how lenders look at these cases.
If you feel ready to speak with an adviser please call us on 0330 030 5050, we will then put you in touch with a fully qualified equity release expert.
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