Younger first-time buyers could be given more financial help from the Bank of Grandma and Grandad, through the use of improved equity release products, a new report suggests.
The document written by Tom McPhail, of consultancy The Lang Cat, claimed that younger buyers are missing out because older members of their family are unable to satisfactorily tap into their property wealth.
Mr McPhail said: ‘Releasing some of the equity in a property means older homeowners can choose when and how they share their wealth with younger generations.
‘An equity release by grandparents of say £20,000 now, could be transformational for a 20 something struggling to raise a deposit and get on the housing ladder but would make only a very modest dent to the value of the grandparent’s house.’
Releasing some of the equity in a property means older homeowners can choose when and how they share their wealth with younger generations, says new report
The report acknowledged that equity release has endured a poor reputation in the past after customers suffered ‘severe’ financial knocks.
The sector has been criticised for encouraging people to take on debt, particularly later on in life.
There has also been other concerns about equity release, such as customers falling into negative equity where the value of a property is less than the loan taken out against it when house prices fall.
The report suggested that while the equity release sector has since begun to put ‘its house in order’, it is ‘still not perfect’ and some regulatory safeguards need to be strengthened.
It called for several issues to be looked at, including early redemption charges on equity release products.
It said that most providers apply a simple sliding scale of charges, for example 10 per cent in year on to 1 per cent in year 10.
However, it claimed that some providers apply an early redemption charge based on prevailing gilt rates at that time, putting customers at an ‘unfair disadvantage’.
This is because the fees are not transparent as there is no way a customer can know in advance whether they’d be liable for a charge and if so, how much.
In the past, customers have also fallen foul of the small print on their equity release loans when it comes to early-redemption penalties – such as couples who must pay an exit fee unless both of them need to go into care.
The report also raised questions about interest rates on equity release products. It said providers should be consistent with their lending criteria and not move the goalposts after customers have taken out a loan, as this can make it harder for them to access a top-up loan in the future, potentially forcing them to remortgage.
Equity release products could help people access their property wealth to help younger members of their family onto the property ladder
The report argued that equity release products could help people access their property wealth to help younger members of their family onto the property ladder.
Mr McPhail added: ‘Raising a deposit has become an increasingly significant barrier to getting on the housing ladder, with increasing numbers of first-time buyers having to rely on financial help from older generations.
‘Releasing some of the equity in a property allows older homeowners to choose when and how they share their wealth with the younger generation.
‘This more targeted approach gives them greater control to use their assets to the maximum benefit at the point of need.’
Raising a deposit is a barrier to getting on the housing ladder, with increasing numbers of first-time buyers having to rely on financial help from older generations, says the report’s author Tom McPhail
Equity release: How it works and advice
To help readers considering equity release, This is Money has partnered with Age Partnership+, independent advisers who specialise in retirement mortgages and equity release.
Age Partnership+ compares deals across the whole of the market and their advisers can help you work out whether equity release is right for you – or whether there are better options, such as downsizing.
Age Partnership+ advisers can also see if those with existing equity release deals can save money by switching.
You can compare equity release rates and work out how much you could potentially borrow with This is Money’s new calculator powered by broker Age Partnership+.*
* Partner link
Jonathan Harris, of mortgage broker Forensic Property Finance, said: ‘Equity release has historically been viewed as a ‘murky’, high-risk sector, fuelled by minimal regulation, poorly-qualified advisers, only a handful of lenders and extortionately high interest rates.
‘Fast forward to today and we see a dramatically transformed sector, benefiting from strict regulation, highly-qualified advisers, multiple lenders and access to very competitive interest rates.
‘Not surprisingly, equity release is now a viable and growing market for older borrowers looking to utilise the gains seen on property prices to bolster lifestyles, as well as pass on wealth to children when they need it.
‘Those considering equity release should make sure they understand the implications and involve family in any decision-making. It is always important to seek advice from suitably-qualified advisers.’
It comes as a separate report by Legal & General suggested that one in every £90 spent by retired Britons is funded by equity release.
It said that equity release funded an estimated £3billion in retirement spending last year, although it didn’t mentioned the money going to younger generations towards buying a property.
Instead, the report’s survey of 2,000 homeowners found that those with equity release have most frequently used the product to finance home improvements, at 26 per cent.
It said equity release is also being used to support costs such as medical expenses at 17 per cent, maintaining living standards in retirement at 16 per cent, and paying off personal debt at 16 per cent, for example paying off interest-only mortgages.
It suggested that equity release is likely to play an increasingly important role in financing care-related expenses, with 19 per cent of prospective homeowners citing it as a consideration.