How to Use Equity Release to Help Your Children or Grandchildren

Equity release mortgages allow homeowners aged 55 and over to access the wealth tied up in their property. The money released can then be gifted to loved ones to help them get onto the property ladder.

Here’s a guide to using equity release for this purpose.

 

What is Equity Release?

Equity release allows homeowners to borrow money against the value of their home without having to make monthly repayments. The loans accrue interest over time and are eventually repaid when the homeowner dies or moves into long-term care. There are two main types of equity release:

Lifetime Mortgages - These work like regular mortgages but without monthly repayments. Interest rolls up over time and the loan plus accrued interest is repaid when the homeowner dies or moves out. [1]
Home Reversion Plans - You sell all or part of your home to a provider in return for a lump sum or regular income. They then get to keep the proceeds when the property is eventually sold. [2]

How Can Equity Release Help My Children Buy a Home?

Many young people struggle to get onto the property ladder due to high house prices and deposit requirements. Equity release allows homeowners to access property wealth and gift it to children or grandchildren to help cover:

  • The deposit - Lenders typically require a 10-20% deposit. Equity release funds can help cover this upfront cost.
  • Legal fees and stamp duty - These extra costs can also be covered by gifted equity release monies.
  • The mortgage - Extra funds may help top up the mortgage and allow children to access better rates.
  • Renovation costs - Money gifted through equity release could fund home improvements.

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What Are the Requirements?

To use equity release for gifting purposes, there are some requirements:

Minimum age is usually 55 years old. [3]
Your property must be worth at least £70,000. [4]
The gift recipient cannot live in the same property as you. The funds must be used to purchase a separate home. [5]
Most providers set a minimum loan amount of £15,000. [6]
It's important to carefully consider any conditions or restrictions applied by your chosen equity release provider.

How Much Can I Release?

The amount you can borrow depends on your age and the value of your home. As a rough guide:

Age 55: You may release up to 15% of your property's value.
Age 65: You may release up to 35% of the value.
Age 75: You may release up to 55% of the value. [7]
Always get expert advice to ensure you release only what is needed. Taking too much equity could leave you short later in retirement.

What Are the Alternatives?

Before turning to equity release, consider if other options could help your loved ones:

Downsizing - Selling your current home to buy a cheaper property could free up funds.
Mortgage or loan - If you still have an outstanding mortgage, a further advance could release funds.
Savings - Making withdrawals from existing savings accounts is less risky than equity release.
Pension lump sum - Some pension policies allow one-off withdrawals. [8]
State benefits - Grandparents under state pension age may qualify for National Insurance credits or childcare top-ups by providing childcare. [9]

The Pros and Cons

Equity release has advantages and disadvantages to weigh up:

Pros:

  • Access tax-free cash from your home to gift
  • No need to make monthly repayments
  • Improved options and rates compared to 20 years ago [10]

Cons:

  • Interest rolls up quickly so total debts can double in 10-15 years [11]
  • Your estate value is reduced, impacting inheritance
  • Equity release may affect your entitlement to means-tested benefits [12]
  • Early repayment charges can apply if exiting the policy

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Take Financial and Legal Advice

Releasing equity from your home is a major financial decision. Seek professional advice before committing:

Consult an equity release adviser to review your options. Make sure they are qualified and hold Equity Release Council membership. [13]
Talk to a solicitor about the legal implications. Get them to review the equity release contract before signing.
Discuss the impact on inheritance and benefits entitlements.
Shop around for the best equity release rates.

With careful planning, equity release can provide a helpful boost onto the property ladder for younger generations. But make sure you fully understand the costs and considerations before proceeding. Seek professional guidance tailored to your situation.

 

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