Can I use equity release to help my child buy a house?

Equity release mortgages allow you to release money from the value of your home and have recently become more popular for a variety of reasons.

With the cost-of-living crisis and the rising cost of housing, we are seeing more parents using equity release to help their children get on the property ladder.

It can be a technical and high risk process, so for anyone considering this route, getting specialist advice is vital. Michelle Hawkins, Associate in Coodes’ Residential Property team, explains some important factors to consider before going ahead.

Why are they gaining popularity?

Equity release mortgages were traditionally associated with using the value in your home to free up additional cash in retirement. More recently, parents hoping to help their adult children with significant purchases has led to a rise in their popularity. In particular, parents are often looking to provide a house deposit to their children to support them with purchasing their first home.

It has been reported that more than half (54%) of UK homeowners with adult children have helped, or expect to help, their children financially to purchase a home. 

Often, parents do not have enough savings to provide this assistance. Many find this worrying as they want to be able to support their children and help them to become homeowners. Therefore, for some, turning to equity release, also known as a “Lifetime Mortgage” can be an option.

How does an equity release mortgage work?

An equity release mortgage allows you to access money from the value of your house. These mortgages are available for homeowners aged 55 and over.

There are different types of equity release mortgages and ways in which you can borrow the money.

If you are a parent looking into equity release for the purpose of providing your children with security for a house purchase, then the amount borrowed (plus interest) is usually repaid from the sale of your home after death or a move into long-term care. You are able to make monthly repayments prior to this, but often this is optional.

These types of equity release mortgages will usually have a ‘no negative equity’ guarantee. This means you, or your estate, will not have to pay back more than the amount received on the sale of the property – no matter how much interest has accrued.

Equity release is not right for everyone but there are circumstances where this type of loan can be helpful.

Is an equity release mortgage right for me?

There are obvious advantages in being able to help your children using funds released through an equity release mortgage. However, there are also some key considerations to be aware of.

Firstly, the equity release mortgage will reduce the size of your estate. If you have other children, this could create a difficult family dynamic if assistance is only given to one child.

Secondly, consideration will need to be given to estate planning. Monetary gifts over £3,000 may be subject to Inheritance Tax if they occurred within seven years prior to death.

If your adult child is married or has a partner, and the relationship breaks down, then your child is at risk of losing some, or all, of the money. However, there are different ways to protect against this which you should discuss with a professional.

An additional consideration is that obtaining an equity release mortgage could affect your personal tax position, benefits you receive and local authority assessment of fees for any residential and nursing care.

Finally, while it is possible to move house or downsize after taking out an equity release mortgage, you would need the approval of the lender for the new property. If they feel the house does not have sufficient value, they will not allow transfer of the loan on to the new house. You may then find you are unable to move without having to first repay your existing equity release mortgage, including potentially costly early redemption fees, and securing a fresh mortgage which in the circumstances could prove difficult if not impossible.

Next steps

Equity release mortgages can be complex. It’s important to understand if it is the right choice for you and your family now and in light of potential future outcomes. Our recommendation would always be to consult a specialist.  

The Equity Release Council is the industry body for the UK equity release sector of which Coodes is a member. Our specialist team of lawyers can offer advice and help to secure an equity release mortgage.

For more information, please contact Michelle Hawkins by calling 01736 352 238 or email michelle.hawkins@coodes.co.uk. Alternatively, you can contact Coodes by calling 0800 328 3282 or fill in our online contact form.