Nowadays, becoming a homeowner for the first time is increasingly difficult. With average UK house prices standing at £223,257 as at June 2017, it means that, in the current climate, a deposit of between £11,150 (5%) and £22,300 (10%) is the minimum needed. In areas such as London, a 10% percent deposit for an ‘average’ home is an eye-watering £48,000. So how are first time buyers funding their purchases?
Aside from savings and loans from financial institutions, there is now a great new option for parents to help their children become homeowners. Equity release is a way of using the latent equity in property to obtain a lump sum that parents can then pass onto their children to use as a deposit.
There are two main types of equity release products available – ‘lifetime mortgages’ and ‘home reversion’ schemes. Lifetime mortgages are the most popular option and enable the property owner to take out a loan against the property in return for a lump sum, an income, or a combination of the two.
Home reversion schemes are where the owner sells part of their home to a private company in exchange for a lump sum, or regular income. When the property is sold, the money is allocated out as per the ownership split, so if the property owner has ‘sold’ 60%, they will keep 40% of the eventual sale price.
According to research, in the first six months of 2017, over 300 first-time buyers were helped onto the property ladder by relatives who purchased an equity release product to free up the equity within their property.
First time buyers funding their property purchase with the help of their relatives is already a very common scenario, but doing it through equity release is becoming an increasingly popular solution and is likely to become more so over the next few years. With equity release schemes interest rates starting from 3.5% MER and with repayment options now available to repay upto 10% of the original amount borrowed, now is a great time for parents to help their children onto the property ladder.