It has recently come to my attention, having watched my own daughter attempt to buy her first property, how difficult it has become for first-time buyers to fulfil their dreams of becoming a homeowner.
It also occurred to me that EQUITY RELEASE could in fact play a significant role in assisting the “Bank of Mum and Dad” and others in providing funds to enable these dreams to come true.
First, Some Equity Release Facts:
- The average age for 1st> time buyers is now 29
- 2/3rds of 1st time buyers now turn to the Bank of Mum and Dad (BoMAD) for help
- 30 years ago 12% of income was needed for a deposit on a property. Today this is staggering 82%!
- The cost of an average house in the UK is 10 times bigger than the average salary rising to 14 times in London
- In all but 2 regions in the UK, prices are 7 or more times the average salary for that area (Office of National Statistics)
- More than 3.3 million 20-34 year olds were still living with their parents in 2013
Although these figures clearly indicate it is becoming almost impossible for first-time buyers to get on the property ladder, help could be at hand – YES, from the “Bank of Mum and Dad”
Parents are an obvious first point of call. However with rising living costs, low interest rates and diminishing savings pots, it has become increasingly more difficult for mum and dad to find surplus funds to gift to their children, grandchildren or loved ones, to assist in fulfilling the dream of property ownership.
However, there could be a way to take an early inheritance from parents now in order to benefit first-time buyers when the money is needed the most!
A special type of retirement mortgage commonly known as Equity Release could potentially unlock cash tied up in a parent’s property. This can enable mum & dad to generate sufficient funds to gift as a deposit on a property purchase for their loved ones.
What is equity release?
Equity release schemes are available in two formats – home reversion & the more popular lifetime mortgage. Both of these equity release schemes enable people who own their main residence to release a percentage of its value in return for a tax-free cash lump sum. These two types of equity release mortgages then run for the rest of your life & only repaid once upon death or moving into long term care.
The equity release scheme known as a lifetime mortgage has proven the most popular due to its flexibility. This has been strengthened this year with providers such as Hodge Lifetime & Aviva both providing an option to repay upto 10% of the original capital borrowed each year. Therefore, control over its final balance, or even repayment of the whole scheme over the longer term could represent a serious possibility, for either parents to pay, or the children themselves!
Lifetime mortgages are available to those aged 55+, with a minimum property value of £60,000. The amount that can be borrowed is not always based on affordability, but on factors such as age & property value. Effectively, the older you are, the greater amount of equity you can release.
Following a release of the equity, the lifetime mortgage company places a first legal charge on the property. This is exactly the same as any conventional mortgage and 100% legal ownership is still retained by the client providing peace of mind.
Typically, someone age 60 could release equity of between 18-25.5% of the value of the property, dependent on the lender concerned. These equity release funds can be spent on anything you like, however a sensible & cautious approach is always advised. Therefore, parents looking to assist their children onto the property ladder, a lifetime mortgage could prove an effective mortgage vehicle to achieve this goal.
Which equity release schemes can help first-time buyers?
Equity release schemes have become a lot more flexible and innovative these days. You can choose to make NO repayments and have the interest added to the loan which is known as a roll-up lifetime mortgage. The amount borrowed plus any interest accrued is repaid upon sale of the property. This would happen on death (last death if joint plan) or having to go into long term permanent care. Thought must be given here should there be more than one beneficiary. With an increasing balance & possibly reducing net equity figure, consideration must be afforded to any remaining beneficiaries as to what they may potentially receive at the end of the day?
However, there are new repayment versions of equity release schemes that have proven even more popular with parents looking to securely gift money to their children to help with a property purchase.
Interest only lifetime mortgages from Stonehaven & more2life will allow the repayment of just the interest only element. By repaying interest charged each month prevents the loan from increasing and thus remains level for the rest of the mortgagor’s life. This is a great idea when there is more than one child involved. The problem has always been how to separate the gift now, from the overall inheritance at the end of the day if more than one child is involved?
The solution is having an interest only lifetime mortgage. By knowing in advance what the balance will be, this loan amount can be deducted from that child’s share of the inheritance at the end of the day. This would be even fairer for the other siblings, should that child also pay the monthly premiums on behalf of the Bank of Mum & Dad!
NEW - Voluntary partial repayment plans
Equity Release Supermarket now has access to specialist equity release schemes where there is the option to repay up to 10% of the original capital released each year without any early repayment charges. These equity release schemes through Aviva & Hodge Lifetime have proved popular for those not just looking to repay the interest, but also the opportunity to repay the equity release scheme in full over approximately 16-17 years. These voluntary partial repayment equity release schemes are proving to be the next generation of the equity release market.
How is the Bank of Mum & Dad protected?
All the equity release schemes we recommend are members of the Equity Release Council, which means that there are certain guarantees built into them for consumer protection. As a minimum the Equity Release Council will ensure the following guarantees are included:-
- The schemes are portable and can be transferred to another qualifying property should you wish to move in the future
- There is a no-negative equity guarantee which means a debt cannot be left to your estate even if the value of the property becomes less than the balance of the loan outstanding
- You can live in your house for as long as you wish and with a lifetime mortgage you retain full ownership
- They can be repaid at any time, subject to potential early repayment charges
Benefits of using Equity Release
Contrary to directly gifting your property to your children, by using equity release to gift instead, would avoid any Capital Gains Tax as the main residence is retained by the client. There could still be a potential Inheritance Tax liability, but only if the client died within 7 years of the gift.
The lifetime mortgage would be a deductible liability against the client’s estate, reducing the value being taxed and although interest would have to be paid on the loan; this could still prove beneficial to both the client and those receiving the gift. Always consult a tax expert on these matters in conjunction with your independent equity release adviser.
Of course let’s not forget the best part of this!
The potential to fulfil the dreams of our loved ones in an age where quite frankly, property purchase is almost becoming nothing more than just a dream for some. The joys of parenthood!
I would be delighted to offer a FREE initial consultation to discuss any of the above matters relating to how equity release can help your children step onto the property ladder.
Please call me on 0800 678 5159 or email [email protected].