Equity Release v Family Mortgage

Many parents are trying to help their older children on the property ladder and we get many enquiries about using equity release.  Parents want to release equity from their home to gift money as a deposit towards a property purchase.

We suggest equity release is the very last item you should consider to help children.  The ideal position would be:

• Educate children early to start saving and when saving then encourage them to save in a product such as a Lifetime ISA (LISA) that attracts a 25% bonus on the amount that you save and can then be released to fund a deposit.
• Encourage children to talk to a mortgage broker or lenders direct to find out if they meet criteria and what they are likely to need as a deposit as well as income, expenses and affordability tests to establish what they could borrow.
• Look at your own savings as a gift.

Consider a Family Mortgage.  This is where the equity in your property can be used by a lender as the deposit.  The lender will place a charge over your property and your child with then pay the mortgage on the full loan amount – technically this could be up to 100% of the mortgage amount.  After a certain period, when the lender is happy that your child has serviced the mortgage correctly (i.e. paid it), they may then remove the charge over your property, you get some interest payments on the equity that you had ‘deposited’ with the lender and your child is now ‘standing on their own feet’.

Finally, if none of the above work then equity release may be the solution.  That said, equity release does have some advantages that you may wish to consider:

Equity Release:

This should be your last option.  You should only do this if you plan to remain in your property for life.

By releasing equity it may help reduce your inheritance tax liability longer term if your debt increases over time to devalue your estate.

If your equity release interest rate is say 3% pa but both your property and your child’s new property are increasing in value by more than this then there is some financial sense in ‘borrowing’ to invest for a greater return.

By releasing equity it may help reduce the value of your assets for any means testing such as care fees as you will have made financial gifts early.

Family Mortgage:

You are using your equity as the deposit but it is still your home that you own in full.

Your child pays the full mortgage so your home is not at risk unless they do not pay the mortgage.

In a couple of years, the charge is removed, you may receive interest on the equity you ‘loaned’ and your child is now on the property ladder in their own right.