The so-called Bank of Mum and Dad in the UK’s ninth-largest lender- in 2018, parents lent upwards of £7.5 billion to their children for help with property alone.
People are clearly willing to dig into their pockets when it comes helping their family get ahead financially. But not everyone can afford to hand out cash top-ups without putting their own finances under pressure.
However, if you’re a homeowner over the age of 55, you may be able to tap into the wealth locked up in your home. If you want to help out your loved ones without stretching your own budget to the limit, equity release could be the perfect solution.
What Is Equity Release?
In the UK, homeowners aged 55+ can use equity release to access the cash locked up in their property.
Using the value of your home as security, equity release enables you to borrow a lump sum or withdraw a steady stream of income from the value of your property.
You continue to live in your home and don’t make any repayments as long as you live there.
The loan and any interest is generally paid off when you die or move into long-term care.
How Does Equity Release Work?
There are two types of equity release scheme available in the UK: lifetime mortgages and home reversion plans. The minimum age for a lifetime mortgage is 55, and 65 years old for a home reversion plan.
A lifetime mortgage is a loan with a fixed interest rate which is secured against your home. Unlike a regular mortgage, you don’t make any repayments. Instead, interest is added to the money you borrowed, which is paid back in full when you die or move into long-term care using funds from the sale of your house.
When you take out a lifetime mortgage, you can choose to withdraw all the equity at once in a lump sum, or withdraw smaller amounts as you need them, in a ‘drawdown’ plan.
Home Reversion Plan
In a home reversion plan, a lender buys a share in your property at a below-market price, while you continue to live in your home as normal. When you die or move into long-term care, the lender recovers its investment through the sale of your home.
You can choose whether to release the equity in one lump sum or to receive a regular stream of smaller payouts from your lender.
How Much Does Equity Release Cost?
Equity release can be quite an expensive way to borrow. That does not mean it is necessarily a bad idea, but it is important to understand the costs and benefits to decide whether equity release is right for you.
In a lifetime mortgage, you don’t make any repayments on your loan while you alive. This means that the interest on the loan compounds on an ever-increasing total, and so mounts up very quickly compared to a repayment loan.
For example, £60,000 in equity borrowed over ten years at 5% would result in a lump sum of £98,820 to be repaid from your estate when you die.
This debt roll-up is one of the major drawbacks of equity release. However, it is possible to minimize the impact of compound interest: making payments on the loan interest while you are still alive or reducing the amount you borrow is a couple of ways to avoid this debt roll-up.
How Can It Help My Family?
For many people, their home is their most valuable investment. However, a property is a fixed asset, meaning it is normally not easy to convert it into cash.
This means it is possible to be the owner of a house worth hundreds of thousands of pounds but still have problems finding the cash to help out your family in times of need.
Under normal circumstances, your family would only be able to benefit from the wealth stored in your home after you have passed away. As life expectancy continues to increase, the children of homeowners may not benefit from family inheritance until they themselves are entering retirement.
Equity release allows the homeowner to convert their most valuable fixed asset- their home- into cash, in order to help their family when they need it most.
The great news is that doing so doesn’t have to be disruptive to the lifestyle or finances of the homeowner. You continue to live in your own home and don’t have to make any repayments on the debt as long as you are alive.
Equity Release as a Living Inheritance
If you have already got a plan for how to finance your retirement, which doesn’t involve the equity in your home, it could make sense to gift your family their inheritance early.
When you release equity, you can spend the money in whatever way you choose, including gifting it to your children or other loved ones who you would otherwise leave belongings to in your will.
This has the potential to be a very rewarding experience because you get to see your loved ones make strides in their financial lives and enjoy the wealth you pass on to them.
Releasing equity as a ‘living inheritance’ could help young relatives to achieve their goals: from going to university, to raising their own children.
Help Your Loved Ones Get a Foot Onto the Property Ladder
In 2018, the average cost of a first home in the UK was £212,473, or £436,827 in London.
With house prices that high, it can be a challenge to save even a small deposit for young people looking to get a foot on the property ladder.
The funds made available by equity release could provide them with a lump sum to top up their deposit and help them set up home, while you are still around to see them enjoy it.
Reduce Your IHT Liability
If a living inheritance is not the right choice for you, equity release may still help your family or beneficiaries of your will in the long run, by helping to reduce the amount of inheritance tax that needs to be paid on your estate.
In the UK, an inheritance tax of 40% is charged on everything in someone’s estate above a £325,000 threshold. For example, an estate worth £400,000 would be liable for 40% tax on £75,000 of the assets. In this example, the executor of the will would need to give a total of £30,000 to the taxman from the estate.
When you release equity, you decrease the value of your estate, and it is possible to minimize the tax liability of the property you leave to your loved ones in your will.
So, even if you do not have the means or intention of giving your family money from your home while you are still alive using equity release, you could indirectly benefit your loved ones if you take out an equity release plan.
As this table shows, even when our own finances are tight still tend to try and help family members who need it.
This table shows the results of a global survey, and how people who support at least one family member financially responded when asked to describe their own financial situation.
|Description of personal finances||Percentage of respondents|
|Managing quite well||36%|
|Managing very well||31%|
|Just about managing||24%|
|Not managing at all well||9%|
Can I Leave an Inheritance to My Family With Equity Release?
By its very nature, equity release reduces the amount your family will receive as an inheritance. However, it is still possible to ring-fence a portion of your property, which can be reserved as an inheritance.
If you decide to do this, you will not be able to borrow as much money against your home. For example, if you wish to leave 20% of your home to your family, the amount you can borrow from a lender will reduce by 20%.
However, it ensures that your family will still inherit wealth from your property no matter how much interest is accrued on the debt.
When you are looking into an equity release plan, you should let prospective providers know if you are planning to do this, so they can adjust their calculations accordingly and give you an accurate quote of how much equity you can release.
Equity Release Pros and Cons
|Help young family members meet their financial goals at the time they need it most||Requires you to be sure that you can afford to finance your retirement|
|Witness young family members making the most of the wealth they inherit from you||Could mean your family members receive less inheritance, as you cannot release 100% equity on your home|
|Don’t pay anything back as long as you remain in your home|
|Minimise inheritance tax to be charged on your estate|
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.