Unlocking net worth tied up in bricks and mortar can help a new generation get on the property ladder, writes Stephen Savill
With inflation staying stubbornly high, the threat of more interest rate rises on the horizon and food prices and other expenses rocketing, the cost-of-living crisis remains very much alive.
Constrained budgets, combined with high house prices and deposit requirements, can mean the prospect of home ownership seems like a distant dream to many young professionals.
Yet help is at hand. Studies show that, increasingly, the traditional first port of call of the bank of mum and dad is being replaced by grandparents unlocking equity held in their homes to give family members a kickstart amid these particularly challenging economic times.
The power of equity release
Research by insurer Aviva[1], for example, suggests up to a quarter of grandparents have assisted – or plan to help – their grandchildren become first-time buyers. It also found that the number of grandparents releasing value from their home has increased significantly over the six years since the company last carried out this survey.
Older family members can use a variety of means to help out younger relatives. A common one is unlocking value held in a home, and the most popular form of equity release in later life is through a lifetime mortgage.
Lifetime mortgages are a loan designed for the over-55s, which are based on the value of a property as well as the age of the youngest borrower where there is more than one.
There is no requirement to make any repayments on this type of loan, although voluntary payments of at least 10% of the original loan can typically be made each year.
For grandparents looking to access property wealth to benefit their descendants and maybe help them get a house deposit together, a key feature is that the equity can be released as a lump sum. Another option is to release some money immediately, with the rest held in reserve for future expenditure or gifting.
Interest is only payable once money is accessed, and rates are fixed at the initial release and then at whatever they are if any subsequent drawdowns take place. A lifetime mortgage is ultimately repaid from the sale of the property when the last remaining borrower dies or moves into permanent care.
Understanding the full benefits of lifetime mortgages
Anyone considering taking out a lifetime mortgage should be reassured that several key benefits are built into each one:
- The right to reside for life, so no unexpected upheaval or a forced move
- Full ownership is retained
- A compassionate window means that on the death or move into care of the first borrower, the second can repay the loan without penalty for at least three years
- A no negative equity guarantee means even if the eventual sale of the property is not enough to repay the outstanding amount of the loan plus unpaid interest, the lender covers the shortfall
- It can be ported to a new property that meets the prevailing lending criteria
Looking to the future
Grandparents exploring this type of equity release may be wondering what the impact of inheritance tax (IHT) would be on any gift. IHT is a tax on the net estate (property, savings and possessions) of someone who has died. And the answer is that while there is a potential IHT implication if the lender dies within seven years of any gift, this can be insured against. The amount of tax due on gifts that are under seven years old also tapers on a sliding scale.
For borrowers interested in exploring this and other later life options available to them, we discuss all possible scenarios, so no decision is taken without a full and deep understanding of the numbers involved, and any future implications.
If you’d like to find out more about lifetime, or other later life, mortgages please get in touch for a no-obligation chat.
Please note: a mortgage is secured against your property. Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. To understand the features and risks, always obtain a personalised illustration. Please also note we do not offer personalised advice regarding home reversion. The information provided about home reversion is for general information purposes only and does not constitute financial or professional advice.
[1]https://www.aviva.com/newsroom/news-releases/2022/08/bank-of-grandma-and-grandad-help-younger-people-get-on-the-property-ladder-for-the-first-time/
