How grandparents are using equity release to help their grandchildren get onto the property ladder

Forget the Bank of Mum and Dad, amidst the current housing boom it’s the Bank of Grandma and Grandad that’s swooping in to help their grandchildren onto the property ladder. In this article, Acumen Financial Partnership explains how generous grandparents are using equity release to bolster the deposits of younger first-time buyer relatives.

The pandemic property puzzle

Navigating a route onto the property ladder has long been a difficult and circuitous one for first-time buyers, even before the pandemic made matters worse. The lockdown period has seen the emergence of a housing market bubble, sending house prices soaring and deposits following suit. Add to this the fact that high loan-to-value (LTV) mortgage products are scarce and the prospects look even bleaker for “generation rent”.

Of course, this prompted Chancellor Rishi Sunak to announce a new government-backed 95% mortgage guarantee scheme in the April 2021 Budget to help first-time buyers or current homeowners to secure a mortgage with just a 5% deposit to buy a house of up to £600,000. The scheme is now available from a range of high street lenders, including Lloyds, Santander, Barclays, HSBC, NatWest and Virgin Money.

On the face of it, that is certainly good news. However, it is tempered somewhat by reports that some of the aforementioned lenders are refusing 95% mortgages on new build homes; at a time when affordable properties are thin on the ground. The Government’s Help to Buy scheme was designed to incentivise the purchase of new-builds, providing a 20% equity loan when combined with a 5% deposit. However, this is due to end in 2023.

So the likelihood is that as first-time buyers clamour for a 95% mortgage, the lack of viable houses will artificially inflate prices even further. Not good. Not good at all. Already, a 5% deposit is likely to be in the region of £12,600, based on the current average house price of £252,765. That is a high bar indeed for anyone trying to save whilst renting. Even with fewer outgoings during the lockdown period as a whole.

So what’s the answer? Well, this is where a little help from grandparents is proving invaluable.

Equity release schemes provide unexpected lifeline

Grandparents gifted an average of £42,500 to their house-hunting grandchildren in 2020, according to figures from Key. That amounts to nearly two-thirds of the average £57,278 first-time buyer deposit. London-based grandparents bequeathed £102,826, while those in the North West gave £23,467. However, not everyone has vast sums of money at their disposal and this is where an equity release scheme can make all the difference.

Around £755 million of the £3.4 billion in property wealth released last year was used for gifting. Within that figure, a massive 43% of those gifts went towards the house deposits of younger generations. So how do equity release schemes work? Well, equity release enables homeowners aged 55 or over to unlock some of the wealth locked up in their home – without having to sell up and move to a smaller property.

The most popular type of equity release scheme is a lifetime mortgage. This entails borrowing a tax-free sum against your home and the amount borrowed (plus interest) is repaid after the borrower passes away or enters long-term care. These funds are usually recouped through the sale of the home. If you’re planning to go down this route to support a grandchild, it’s crucial to bear in mind your tax liabilities.

Under the current government rules, gifts of up to £3,000 within a tax year are not considered part of the value of your estate, and are therefore exempt from inheritance tax (IHT). Anything over that figure could be. However, provided you live for seven years after giving the gift, the amount of inheritance tax you owe will taper downwards to 0%. Equity release is a lifelong commitment, which is why it is crucial to seek the professional guidance of a reputable financial adviser before you embark on such a decision.

Acumen Financial Partnership can provide an experienced and highly qualified financial adviser to discuss the best equity release options for you. We can break down how equity release schemes work and what types of equity release schemes are available to you. Deciding on which plan is suitable for you can be complex, and there are some associated risks to bear in mind. With our extensive knowledge of equity release, we can guide you through the various options available to help you find the right solution for you.

For more information about equity release, or to speak to one of our advisers, please contact Acumen today by calling 0151 520 4353 or email us at info@acumenfinancial.co.uk.