Jack, 30, and his girlfriend Lily, 29, live in a very nice rented flat, a short commute to their London offices – but they see every payment to their landlord as money that could be going towards owning their own home. Like many young couples, they are desperate to get onto the property ladder. They’ve taken advice on getting a mortgage – but their combined salaries will not qualify them to buy a comparable flat to the one that they currently rent.
Jack’s parents, Mark and Debbie, both 62, know how lucky they were to have bought their first home in the 1980s, when property was affordable even for modest earners. They want to help their son buy a house – and borrowing against their own home seems the only way they can do this.
But what are the implications – for them, and for Jack?

I am seeing a lot of people like Mark and Debbie, and I know how keen parents are to help their children. Using Equity Release is a great idea – it is easy and cost effective. It will enable Jack and Lily to put down a much bigger deposit on their first home, and that could also help
them get a lower interest rate mortgage. But they will need to think about the following:

Interest on the loan

By borrowing against their own home, Mark and Debbie will be committing themselves to years of interest that will either need to be serviced or left to roll-up. This is something that the family will need to take a view on as the amount that eventually needs to be repaid will come out of Jack's inheritance.

One option may be for Jack and Lily to pay Debbie and Mark the equivalent amount of interest, so it doesn't accrue. However, they will need to think about whether they will always be in a position to do this. For example, if their own mortgage payments increase – due to a future hike in interest rates – they may struggle to meet the extra payments to Debbie and Mark.

When discussing the situation with the family I will explain that:

  • While interest rates on a standard mortgage may rise, the interest on the ER loan is fixed – so there will be no nasty surprises and everyone will know exactly what has to be paid every month.
  • While Debbie and Mark may worry that they would have to find the money to service the interest if Jack and Lily stop paying them, there will always be the option of leaving the interest to roll up – so Debbie and Mark will not be out of pocket.

Future plans

Debbie and Mark will also need to think about their own future. If they give Jack the money now, can they be sure they will have enough  capital going forwards for their own needs? Depending on how much they borrow now, they may have very little to draw from if they want ER for their own use further down the line. It is important to think this through, but Debbie and Mark are still relatively young to be taking out ER. As they get older, there will usually be the possibility of returning to the lender for a supplementary ER loan. As a rule, property owners can borrow around 25% of their home's value at 55, but this rises to 55% for someone in their 80s. The exact percentages offered vary according to the lender and the applicants' individual circumstances so it's important that Mark and Debbie discuss their future plans and needs with their adviser.  

Inheritance

Equity Release also has an impact on inheritance tax – by borrowing against their home, Debbie and Mark will reduce the value of their estate, and this could be advantageous to Jack (and any siblings). The money can also be gifted to Jack in trust, meaning that Debbie and Mark still exercise some control over how the money is used. For example, Jack couldn't sell his new house and use Debbie and Mark's loan to buy a yacht without their say so!

There is much to discuss and consider, but the overall news is good: ER is a very good way to help your adult children.