Can a living inheritance via equity release help younger generations gain home ownership?
The family home is, typically, the single biggest asset owned by retirees. The growth in later life lending demonstrates that equity release can be deployed as a useful source of additional funds to bridge the gap created by the shortfall in lifetime pension and savings provision.
Advisers are, of course, familiar with the benefits of releasing equity to help with everything from home improvements and holidays through to supporting increases in the costs of living. One area that has gained greater prominence in recent years is the ‘Bank of Mum and Dad’, with gifts and loans from parents and grandparents set to top £25bn between 2022 and 20241.
It could therefore be the case that releasing equity from the family homes of retirees has a much bigger role to play in the future of a more sustainable housing market.
Boomers and their equity
Today’s retirees have benefitted enormously from decades of house price inflation (HPI), leading to vast amounts of mortgage-free housing wealth (an estimated £1.8 – £2 trillion2 ) in the hands of the over 60’s3. It is often commented on that the ‘boomer’ generation are the ones who have enjoyed the ‘best of times’ (peace, security, home ownership, relative economic stability and prosperity), leading to some resentment amongst younger generations who are experiencing record costs of living, renting for years on end and personal debt.
Recent customer research from Aviva4 showed that there is a strong desire to pass housing wealth onto future generations, but consideration as to the timing of this inheritance is rarely given. The over-riding assumption is that it will happen on death. Current life expectancy5 means that the receipt of any inheritance may typically occur when the adult child is in their fifties or sixties - well beyond the age when this money would have been of most use to the inheritors.
Benefitting younger generations
Reviving ‘dead’ housing equity to bring greater levels of home ownership amongst younger people merits much greater consideration as a solution to a growing, and seemingly insoluble problem for ‘generation rent’.
Of course, where copious levels of savings and pension provision are in place for a comfortable retirement, gifting from these assets should be considered first. However, for those who do not have sufficient assets to spare, with the right advice, turning to housing equity should demand more active consideration, particularly if the client wishes to help loved ones.
Currently around 20% of equity release customers are releasing capital from their homes to gift cash to others6, usually children or grandchildren. Typically, this money is used to provide a deposit to help buy a home but can also be put towards other things such as school or higher education costs. It’s always worth remembering that the money released via a Lifetime Mortgage in tax fee.
The effect of borrowing can be reduced if interest repayments can be supported – the example below shows how this could work. Clearly, there needs to be sufficient income available to comfortably service these repayments without them adversely affecting the borrower’s quality of life in retirement.7
Those who choose to gift housing equity typically have a strong conviction to help others whilst they are still alive. They also gain the emotional fulfilment of seeing the impact that reviving dead equity in the family home can bring to those who they love.
The examples below show the borrowing costs for a residential mortgage at 75% LTV with the deposit of 25% being provided by a Lifetime Mortgage (LTM).
Accumulated interest costs on the LTM are obviously lower if repayments are made in full. It is also worth remembering the mitigating effect of HPI on the final debt.
Based on 35 year mortgage term, initial 5 year fixed rate of 5.44% AER
|Purchase price of the property||£250,000||Capital & interest repayment||Interest Only|
|Loan @ 75% LTV||£187,500||£999.55||£850|
|LTM deposit @ 25% LTV||£62,500||n/a||£345 (see below)|
|Property value £500,000||Initial borrowing||Monthly cost||Accumulated interest charged after 15 years||Repayable on death after 15 years||Property value in 15 years @ 3% AER HPI growth|
based on rate of 6.63% MER
Roll up LTM
based on rate of 7.19% MER
Finally, it is always worth remembering that for many people their natural answer to releasing equity is to say that they will downsize. Although this seems a logical choice in theory, strong emotional ties to the family home and the community which will often mean that downsizing may not be the right solution.
Also, in practice, downsizing often doesn’t release as much money as might have first been expected once the costs of moving, stamp duty and the new bungalow or flat are taken into consideration.
1 Savills Research
2 Savills Blog
3 The Lang Cat, House Rules, June 2022
4 Aviva Research Report, Summer 2022
5 ONS. Contains public sector information licensed under the Open Government Licence 3.0.
6 Key Market monitor Q1 2022
7 For some, an informal agreement for the recipient to help cover some or all these interest payments could be considered.