If your home has risen in value over the years, you might be considering unlocking some of your property wealth to provide your children with a ‘living inheritance’.
A living inheritance, as the name suggests, is an inheritance you give to your loved ones while you’re still around, rather than when you die. Many people want to help their children out financially during their lifetime, but may not be in the position to give away savings, particularly as the cost of living is soaring. However, rising house prices over recent years mean that lots of homeowners own a large amount of equity in their property, particularly if they’ve paid off some or all of their mortgage.
Gifting some of the value of your home could potentially provide your children with money to put towards taking their first steps onto the property ladder, for example, covering education costs, or even help them with longer term financial goals such as starting a pension. However, it is definitely not a decision to be entered into lightly, and there are several downsides to consider first.
Here, we look at some of your options for taking a lump sum out of your property to give to your children, as well as some of the pros and cons of doing so.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Contents
- Giving money to your children using equity release
- How does equity release work?
- Getting advice on equity release
- Remortgaging to give money to your children
- How does remortgaging work?
- Getting advice on remortgaging
- Retirement interest-only mortgages
- How do RIO mortgages work?
- Getting advice on RIO mortgages
- Financial gifts and inheritance tax (IHT)
Giving money to your children using equity release
If you’re aged 55 or over and want to give your children some money, one way to unlock some of your property wealth is by taking out an equity release plan. This could provide you with a lump sum to pass onto your child, while enabling you to remain in your home. Any money released, in addition to interest payments that build up on it, eventually gets paid back when you die, or move into long-term care and the property is sold. Read more in our article Equity release – what is it and how does it work?
The most popular type of equity release plan is a lifetime mortgage, which allows you to release equity with interest charged on the amount you have drawn down. The interest owed then gradually rolls up over the years, so you don’t make monthly repayments as you would with a standard mortgage. However, you may be able to pay some interest back each month, if you wish, or make partial repayments, depending on your particular plan.
Bear in mind that taking out an equity release plan is a major financial commitment and it definitely won’t be right for everyone. Costs can be high because usually you’re not repaying any of the interest on the money you’ve borrowed, so interest rolls up and is compounded. This means that you’re essentially charged interest both on the original sum unlocked and also on any interest already charged. It’s therefore vital to check that you’ve gone for the most competitive equity release rate possible, as this can make a big difference to the amount charged over twenty years.
Our Lifetime Mortgage Calculator can give you a quick indication of the costs that might be involved. You can also compare the costs of a lifetime mortgage where you are making monthly interest repayments compared to instead choosing to roll up the interest without making any monthly repayments. See more in our article: How much does equity release cost?
It’s also worth remembering that if you receive means-tested benefits, receiving a tax-free lump sum, even if this is passed onto your children, affects your entitlement to these benefits. Read more about the advantages and disadvantages of equity release in our article Is equity release right for me? and Benefits of an equity release plan and Equity release – what are the risks?
How does equity release work?
The older you are, the greater the proportion’s value you may be able to borrow. At age 65, you can usually release up to around 25% of the value of your property, and this may rise to as much as 50% or 60% if you’re older. Find out more in our article How much equity can I release?
You can release more equity as you get older because it’s expected that it’ll take less time for the equity release provider to get their money back. You can usually take out an equity release plan until you reach the age of 85.
Getting advice on equity release
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
They can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC. Learn more about equity release provider that belongs to the ERC.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Remortgaging to give money to your children
The majority of homeowners remortgage to reduce their monthly mortgage repayments when their existing mortgage deal ends rather than moving onto their lender’s usually expensive standard variable rate Read more in our article Five good reasons to remortgage right now.
However, you can also remortgage to release equity tied up in your home that can be passed on to your children, particularly if you’ve already paid off a significant amount of your mortgage and the value of your property has increased since you bought it.
Find out more in our guide When is the best time to remortgage?
The amount of equity you have in your home is worked out by deducting any outstanding mortgage from the market value of your property. This gives you the loan-to-value (LTV) ratio. For example, if you bought your home for £300,000 with a 25% deposit, and a £150,000 mortgage, the LTV is 75%, and you have £75,000 equity. Over time, the amount of equity you have depends on how much of your mortgage you pay off, and the current market value of your home. For example, if after 10 years, your home is worth £400,000, your equity increases to £175,000.
There are downsides to remortgaging, of course, as you might face a penalty if you do so before your existing mortgage deal has come to an end. If you’re releasing equity, you’re also increasing the size of your mortgage, and therefore your monthly repayments. Plus, if you release a large amount of equity your LTV will increase, and this could reduce your chances of securing a cheap mortgage deal in future. It might be that there is a cheaper way to borrow the money that may suit you better, but this will entirely depend on your personal circumstances.
How does remortgaging work?
Remortgaging can be a relatively simple process. For example, let’s say you want to release £50,000 of equity, and your current mortgage debt is £150,000. You might apply to remortgage £200,000, and use the bulk of this money to repay your old mortgage, giving you £50,000 to gift your children. Your new mortgage balance will be £200,000, but you will still have £100,000 in equity in your property. However, it’s always worth speaking to a mortgage broker to work out how much you can release and still secure a good mortgage deal.
Getting advice on remortgaging
You can get tailored advice from a mortgage broker to help you find the best deal for you, and navigate lenders acceptance requirements. This can be particularly useful in a changing mortgage market, and if you have particular requirements that need specialised advice.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Retirement interest-only mortgages
Retirement interest-only mortgages aimed at borrowers in their 50s and 60s can also be a way to release some equity locked in the value of your home. They are also a way to remortgage if you’re having difficulty securing a standard mortgage deal because you’re aged 50 or over. Similarly to a normal interest-only mortgage, you take out a loan against the value of your property and repay the interest on your borrowing each month, and not any of the capital. Read more in our article How retirement interest only mortgages work.
This type of mortgage is significantly different to a standard interest-only mortgage with a specific end date by which you must repay your debt. By taking out a retirement interest-only mortgage, you can continue to make interest payments into retirement, with the loan only paid back when you die or move home. If you take out a joint RIO mortgage, this applies to both borrowers, so you don’t need to sell if your partner moves into care or passes away.
RIO mortgages appear similar to equity release lifetime mortgages, as they are often used to release equity. However, with a RIO, you repay the interest as you go, rather than interest rolling up over the years.
How do RIO mortgages work?
If you’re taking out a retirement interest-only mortgage, you can borrow less than you’d be able to with a repayment mortgage. To get a RIO mortgage, you need to prove that you can afford the monthly interest payments on the loan, and if you’re receiving a pension, you’ll typically have to provide details of any private and company pensions, and your State Pension. However, as these are lower than standard repayment mortgages and you only repay the debt on death or moving home, it’s generally easier to get a RIO mortgage than a standard interest-only mortgage.
The amount you can borrow depends on your personal circumstances, and the lender’s eligibility requirements. Usually, you’ll be able to borrow a maximum of 60% LTV, so you need to own at least 40% of your property outright before you’ll be accepted for a RIO mortgage.
However, let’s say you own a property valued at £200,000, and take out a RIO mortgage for 25% of its value, equivalent to £50,000, at a rate of 5%. Around 10 years later the property is worth £300,000, and you’ve moved into long-term care so it’s sold.
Over the 15 year term of the RIO mortgage, you’ll have made monthly interest repayments of £208.33 and paid a total interest payments of £37,500. As only interest payments have been made and you still need to repay the original debt, £50,000 is still owed, and this is repaid once the property is sold, leaving £250,000.
Getting advice on RIO mortgages
You’ll usually get a retirement interest-only mortgage from a building society. However, as with any mortgage deal, ensure you get the best option for you, and compare what’s on the market.
It’s not always easy to work out whether a RIO mortgage is right for you, or whether you might be better off with a different type of deal, so if you’re in any doubt, seek professional mortgage advice.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Financial gifts and inheritance tax (IHT)
Inheritance tax is payable at 40% on the value of your estate above £325,000 when you die, or £650,000 if you’re married. However, if you think your estate will be liable to IHT, you may be able to reduce your liability to this tax in some circumstances by making gifts to your children.
Any money you release from your property to give to your children will still be liable for IHT if you die within seven years of giving the money, but if you live longer than seven years after making the gift, no IHT is payable.
Bear in mind that you can give away £3,000 each tax year free of IHT, and carry any of this allowance that remains unused over to the following tax year, up to a maximum of £6,000 if you wish. You can also make smaller gifts of up to £250 a year to as many people as you like, but you cannot combine this to giving one person this and your £3,000 annual allowance. Find out more in our article Which gifts are exempt from Inheritance Tax? and Understanding Inheritance Tax.
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