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Equity Release to Help Children – Complete Guide

Equity Release Help Children

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can you use equity release to help children? 

Equity release is well-known as a way for seniors to help fund their retirement, which may mean different things to different people. But can equity release help power the bank of mum and dad? We discuss the possibility for equity release to be used as a financial gift – and the consequences. 

What is equity release and how does it work?

Equity release refers to either a lifetime mortgage or home reversion plan as ways to release equity from your home as a senior homeowner. Most older people and retirees struggle to access credit but equity release can be a solution.

It allows the homeowner to access a loan as a lump sum or drawdown based on their age, property and home equity. This loan is not paid back each month like most other loans. The loan only has to be paid in full when the home is sold, usually after the death of the last surviving homeowner. If the last surviving homeowner has to move into long-term care, then the lender can ask for the property to be sold and the debt repaid. 

To be eligible for an equity release plan, you must meet an age requirement (usually 55+), own your home outright, and be releasing equity from your main residence rather than a rental or second home. 

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  1. Lifetime mortgages

Lifetime mortgages are the most common method of equity release in the UK and they come with subtle variations. The standard lifetime mortgage allows the homeowner to access up to 60% of their equity at best. The loan is subject to a fixed rate of interest that rolls up and makes the debt grow bigger as time progresses. Some lifetime mortgages allow the homeowner to make voluntary interest repayments so the debt doesn’t grow too big and eat further into their loved ones’ inheritance. 

  1. Home reversion plans

Home reversion plans are less common and do not charge interest on the loan. The lender guarantees a profit by asking for a much greater percentage of the property’s future sale money in comparison with the percentage of equity released. For example, the homeowner may receive 20% equity as a lump sum but have to repay 55% of the sale value in the future. Unless something drastic happens to the property value, the lender ensures a profit. 

Stick with the Equity Release Council

The Equity Release Council (ERC) is a group that creates rules and guidelines within the equity release industry. These rules and guidelines are made to protect homeowners and offer them greater assurances. 

Lenders and financial advisers can become members of the Equity Release Council but they are not forced to join. It can be in their interest to become members because many homeowners will only consider an equity release plan from a member because they benefit from additional assurances and guarantees. Only legitimate companies that are authorised and regulated by the Financial Conduct Authority can join. 

To give you an idea of why sticking with Equity Release Council members is usually better, here are some of their rules:

  1. Homeowners must never be evicted from their homes or forced to sell their homes unless they lie on their application, are no longer living at the address or are allowing the property to fall into serious disrepair. 
  2. Homeowners must be allowed to move home and take their equity release plan with them when the new property is considered suitable.
  3. Lenders cannot recover debts that exceed the value of the property when it is sold. This is known as the negative equity guarantee. 

General pros and cons of equity release

The primary benefits of equity release are:

  1. Cash lump sum or drawdown
  2. The money is not taxed
  3. No repayments required
  4. No rent needs to be paid to keep living at your home

The main disadvantage of equity release is the overall cost. You may have to pay back double or triple, which reduces your children’s inheritance. It’s almost impossible to get out of the agreement too, due to high early repayment fees.  

What is equity release money used for?

Equity release is an option exclusively for senior homeowners nearing or already in retirement. The money they receive can be used for any purpose but is frequently used for:

  1. Everyday retirement living expenses
  2. Private medical services, such as at-home care
  3. Holidays and cruises
  4. Home improvements, such as making a home more elderly or disability-friendly
  5. A combination of the above

Can I give equity release to my children?

Some seniors using an equity release plan decide to give some or all of their loan to their children. The most common reason for doing this is to help them get on the property ladder. However, there may be other reasons for doing this, such as helping them start a new business. 

Giving equity release to your children is allowed because you can spend the loan however you wish. 

The bank of mum and dad 

The bank of mum and dad is no longer just a tongue in cheek phrase to describe a little financial support from parents. It is being heavily relied upon by younger generations, especially millennials who have now experienced the financial crash and the pandemic in their early working lives. 

In fact, the latest research highlights how big the bank of mum and dad really is, especially when it comes to helping their children buy their first home. The Independent reports that 40% of first-time buyers are receiving some financial backing from their parents to complete their property purchase. 

“Can I release equity for my son to avoid inheritance tax?”

You might be wondering if you can use equity release to avoid inheritance tax. Inheritance tax is only applied to valuable estates that are passed to non-spouses or civil partners above £325,000. If you pass on a property to a child within your estate then the threshold increases to £500,000. Because you may have to sell your property to go into care, there is a risk that you will not pass on a property and the threshold will decrease. 

Furthermore, any money that is gifted within seven years prior to death is also subject to inheritance tax. So releasing equity and giving the money to children and dying within seven years will not help you avoid inheritance tax on this money. It will do if you live for more than seven years after giving the money away.

There are ways that equity release can mitigate inheritance tax, but these methods provide some risk and should be discussed with your financial adviser. 

Equity release to pay for school fees

Another common reason that senior homeowners take out equity release is to help their children or grandchildren pay for school fees. This may include private schools or university tuition. 

It could be a wise investment that benefits their loved ones’ lives in unquantifiable ways over their lifetime. If it lands them a better-paying career, it might even be financially advantageous over the long term, despite the high costs of equity release. 

Should I release equity to help my children?

Releasing equity to help your children may not be financially beneficial in the long run because they would receive more from you if they waited to receive your inheritance. However, finances are not the only consideration. You may benefit from seeing your children access quality education and get a good career, or you may be happy and feel satisfied to help them buy their first home. 

It is an entirely personal decision that should be backed up with the correct knowledge and guidance from an equity release professional. 

Will equity release affect my state pension entitlement?

Equity release does not affect a homeowner’s right to receive a state pension because state pension payments are not means-tested. However, some people are entitled to receive Pension Credits, which is a type of top-up payment to the state pension. Pension Credits are means-tested. These payments are reduced by £1 for every £500 you have above £10,000. 

To prevent your equity release from stopping your Pension Credit payments, you may need to spend the money quickly, such as on home improvements or giving it to children. Or you could consider a drawdown lifetime mortgage so you never receive a large sum of money at once. 

How can I help my children get on the property ladder?

If you are part of the bank of mum and dad, you’re probably wondering how you can help your son or daughter get on the property ladder. Equity release is one option. 

Sometimes equity release is avoided because it takes away from their children’s inheritance. But if you are giving the money to children who will benefit immediately, and you get to witness that benefit, then it is an even more attractive option. 

Can I release equity for my children? (Quick recap)

Equity release can be used to help children with their own finances. There are scores of senior homeowners choosing equity release and giving some or all of the loan to their children to help them get on the property ladder, which is proving more difficult than ever. Other reasons that the money is given to children is to help fund private school fees and university, or to start a new business. 

In rare situations, it may even help their children avoid inheritance tax, but this is not a straightforward issue and should be discussed with a financial adviser first. 

Find more free educational content on equity release

Learn more about equity release now on MoneyNerd. We have over 100 new articles discussing how to use an equity release calculator, scam equity release stories, equity release on leasehold properties and much more. If you have an equity release question – we have the answer! 

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