Bank of Mum and Dad reopens for business as children struggle

Equity release schemes let young people finding it difficult to buy their first properties get a leg up on the property ladder.

(MARTIN HUNTER)

How much would you sacrifice for your children? An awful lot probably. How about signing over a portion of your home so that they can own theirs? That is precisely what thousands of parents are doing by releasing equity in their own homes.

"We have seen a sharp increase in the number of clients who are saying they need the money to help their kids either get on the property ladder or to help them move out of negative equity," said Dean Mirfin, a director at Key Retirement Solutions, an independent financial advice (IFA) firm specialising in equity release.

Key's internal client statistics show that 36 per cent of people buying an equity release product gave helping their children with property as a reason, up from 25 per cent two years ago.

"Parents either seeing their children faced with not being able to get a mortgage or being stuck on expensive deals are acting to free up cash to give to them. In effect, they are being handed some of their inheritance early to tide them over the credit crunch," Mr Mirfin said.

Even just a few thousand pounds raided from the bank of mum and dad can make a huge difference to the housing prospects of their offspring. According to financial information service Moneyfacts, the average interest rate on a 90 per cent loan to value fixed rate mortgage is 6.55 per cent, while someone able to find a bigger deposit of 25 per cent can expect to pay just 5.24 per cent on average.

Nevertheless, the equity release market as a whole is down about one-fifth year on year. "It's natural that with property values falling, people are a bit nervous that they won't be able to release the money they need, hence some are waiting and seeing or exploring other options," said Jock Cassidy from Ashley Law Independent Financial Advisers. But according to Mr Cassidy, options can be limited. "Downsizing suffers from the same property market problems and there is often a strong emotional attachment to a family home. If the individual has an income they can remortgage or draw down from their current mortgage, but they will have to make repayments on this debt."

But a fall of one-fifth in total equity release contracts is small beer compared with the drop-off seen in new mortgage applications. "Some advisers have seen their mortgage business disappear completely. They are now being encouraged to sell equity release instead and this does raise concerns," Mr Mirfin said.

Consumer group Which? last week condemned the quality of advice being offered to people looking to release equity from their homes, echoing previous concerns raised by the Financial Services Authority in 2005.

According to Mr Cassidy, equity release is not to be taken out lightly. "You have to examine all the client's circumstances before considering equity release. For example, the cash people receive through equity release could bar them from vital benefits such as pension credit."

There are two main types of equity release, home reversion and lifetime mortgage. Home reversion plans involve selling your property now to a financial provider in return for a cash lump sum and the right to live in the property, rent-free, for life. These plans have declined in popularity in recent years, though.

With the other alternative, a lifetime mortgage, you keep ownership of the property and take out a mortgage, but instead of paying the mortgage interest every month, it "rolls up" and is paid, with the capital, out of your estate or if you sell. "Equity release can be a complex product with major differences from contract to contract," said Vanessa Owen, the head of equity release at Liverpool Victoria. "Check that your adviser regularly works in the field of equity release and make sure you get a solicitor to read the contract."

Despite the recent fall in equity release contracts, a combination of the ageing population, low levels of pension saving and paltry annuity rates is likely to encourage more people to look at equity release.

"Another major reason for equity release is to fund crucial home improvements which allow them to stay in their own home rather than go into a nursing home," Ms Owen said.

Helping hand: 'My daughter could buy her own home'

Ann Robertson, 70, a retiree from Renfrew, Scotland, wanted to help her daughter buy her first home. "She had been paying rent for years and she really wanted her own place," said Ann. "But mortgage lenders ask for such massive deposits these days it's almost impossible."

So Ann, advised by Key Retirement Solutions, decided to release some money from her property to give to her daughter. "I wanted to still own my home so went for a lifetime mortgage. They valued my flat at £80,000 and from that I was able to free up £26,000 in return for 30 per cent of the property."

Ann took legal advice before signing the equity release contract and had to pay surveyor's fees. "I did it at the start of the year and it freed up enough cash for me to fund my daughter's deposit and to allow her to cover the moving fees. She now has a nice house in the same town as me."

Ann has one eye on the possibility that in years to come she may need to move out of her home. "If I were to need long-term care, the authorities may force me to sell my home, so I figure I might as well get something out of it now rather than leave it to chance."