Equity Release: The Bank of Mum & Dad
What do we actually mean when we use the phrase, “The Bank of Mum and Dad”?
The bank of mum and dad is often used to describe parents or grandparents gifting money to their children or grandchildren for a variety of uses. As lenders, in fact, they are 10th largest in the country, so it’s a huge market. In most of these cases, the parents and grandparents are using equity that’s tied up in their home in order to help their kids financially. In fact last year, 27% of all equity release was given to family or friends.
What are the main reasons for gifting equity to family and friends?
There are a variety of reasons that people are using equity release and it varies across the age range. Equity Release is available for people aged fifty five plus. People use equity release for holidays, home improvements, debt repayment, and clearing outstanding mortgages.
61% of the loans have some element of home improvement and debt consolidation is just higher than gifting. The interest rates are very high and they are looking to consolidate those. So Equity Release is a very user-friendly option for people in relation to that. The key thing to remember is that when you start talking about percentages of what people are using it for, they often use Equity Release for two, three, or even four particular reasons, so percentages can be misleading.
What do family members use the money from gifted Equity Release for?
Almost half of all those who are gifted Equity Release use it as a house deposit. So in the past, a big part of this has been parents helping their children to get onto the property ladder.
With the advent of Covid, lenders reduced the amount they were willing to offer and 90% and above mortgages were largely unavailable. Until very recently, where some lenders have reintroduced 90% mortgages, people were struggling to save enough of a deposit for an 85% Loan to Value mortgage.
As many First Time Buyers had been saving for a considerable time to get the previously adequate 5% deposit together, an additional 10% requirement on top of that had a very negative impact on their ability to obtain a mortgage offer. This led to a lot of early inheritance offers, with parents and grandparents wanting to gift their children so that they can see them enjoying their new home.
With personal also at a worldwide high, one in ten used this gift to repay personal debts and there are, of course, a few other situations, such as weddings, but the fact is that 43% of Equity Release is used to help family members get onto the property ladder.
On top of overall affordability, the more deposit a buyer puts down, the better the interest rate they can get on their mortgages, which is another good reason to gift your Equity Release to those buying a property. This not only potentially enables them to get a nicer house, but can keep their long-term costs down as well.
Whereas in the past it was more traditional for parents and grandparents to leave their house as inheritance, polls show that over 55% of the population are keener to see and support the young people in their family now, whilst they’re alive and see them enjoy it.
Equity Release Products
There are a range of Equity Release products out there today, which makes passing your inheritance to your children within your own lifetime much easier. The protection that people are afforded with equity release now is also much better than it ever was. Lifetime Mortgages are regulated by Financial Conduct Authority and the Equity Release Council ‘no negative equity guarantee’ ensures that borrowers can never owe more than their property’s worth.
The other point to consider about Equity Release is that it’s benefiting your children and your grandchildren because your children are able to supply your grandchildren with a better house or a better standard of living.
What is the average amount that people gift towards deposits from their Equity Release?
The average amount depends on the age of those who release the equity with the over seventy fives gifting on average around £75,000. This reduces to an average of £49,000 for the over sixty fives and just £28,000 for the over fifty fives. This is because the Equity Release marketplace is based on your age and the older you are, the more you can release.
With regard to having slightly less equity to offer, if that amount increases your children’s Loan to Value ratio from 90% to now to 85%, it will still make a huge difference in terms of the monthly repayments and the interest rates for the borrower, so don’t worry if you can’t afford to loan your children the entire 10% deposit amount.
Whilst Equity Release puts you in control of when and how to gift your children or grandchildren their inheritances, it’s important to realise that if you’re gifting it for a house purchase, you have no control over the property.
How does a Lifetime Mortgage work?
In order to be considered for this type of Equity Release you will need to fulfill the following criteria:
- You must be aged 55 or over
- You have to be a UK resident
- Your property must be valued at least £70,000
There’s no affordability check because with a Lifetime Mortgage, it’s fixed for life and it only becomes repayable once you die or go into long-term care. Lenders release money based on your age and life expectancy, if you’ve got a health issue, then you’re less of a risk. You could potentially borrow sixty percent of your home’s value if you are in ill health or over the age of ninety.
There are many more protections in place for Lifetime Mortgage than there were in the past and the average interest rate is about 2.8%, which is fixed for life. Rather than pay the interest monthly, you can choose to compound it until the end of the mortgage.
Whe you die or go into long term care, you will pay for both the capital and interest out of the proceeds from the sale of your house or your estate. Until that point, your home remains yours and you’ve got the right to continue living there for as long as you wish.
You also have the option to move home if you choose to, as long as the lender agrees to your choice of property.