People are now living increasingly longer lives and the traditional method of passing on their accumulated wealth to their children, through a Will, can mean that the children themselves are approaching middle-age by the time they inherit. Their needs are unlikely to be as pressing then as they will have been in previous years, especially in the light of the difficulty that first-time home buyers now face in providing a deposit.
For that reason, increasing numbers of pensioners are deciding to help their children when they need it the most and a report published by the Equity Release Council in December 2014 confirmed that the bank of mum and dad is playing an increasingly prominent role in providing financial assistance to their adult children.
There are several ways in which the bank of mum and dad may fund this assistance. There are those who have accumulated cash savings, which they feel would be better spent on their children than lying in an account attracting minimal interest, whilst others utilise the lump sum element of a pension. For many, however, the only valuable asset that they possess is their home, in which all their wealth is locked. Nevertheless, there is a way, in the form of Equity Release, to unlock an amount of capital from the house to provide the financial support that their offspring so badly need.
What is Equity Release?
Equity is the value of a property after deducting any outstanding mortgage and equity release means, in simple terms, unlocking equity in a house to make an amount of cash available. Equity release schemes are normally only available to home owners who are over 55. The availability of an equity release scheme is also likely to be greater if the house has no mortgage, although some providers are willing to agree to an arrangement if there is a modest outstanding amount. The reason that many homeowners are turning to equity release is that it provides an immediate, tax free lump sum, which can be used for whatever purpose they choose, whilst allowing them to continue living in their home.
Types of Equity Release Schemes
Although some homeowners enter into a home reversion arrangement, where part, or all, of their home is sold in return for a lump sum or regular payments, the more popular form of equity release scheme is the lifetime mortgage. In this type of arrangement, the equity is released through taking out a mortgage against the house. Repayments are not required whilst the homeowners are alive but interest is added to the loan, which must be repaid if the property is sold or on the death of the homeowners.
There are certain additional factors that may need to be considered in individual circumstances and financial advice should always be sought before entering into any arrangement but, in most cases, equity release schemes are a useful way of enabling the bank of mum and dad to provide their children with a tax free lump sum to help them manage their finances at the time that they need it the most.
Image courtesy of Shelter