07 February 2022

Five ways equity release can help first-time buyers

The challenge for first-time buyers

Rising house prices and an inflated rental market have made it much harder for today’s generation of first-time buyers to save for a deposit, with many people nearing mid-thirties before they can afford to get onto the property ladder.

More than half of first-time buyers said raising the funds for a deposit was by far the biggest barrier to homeownership. As a result, many first-time buyers are reliant on the generosity of parents to help them reach their deposit amount. In 2021, the total ‘Bank of Mum and Dad’ contributions were predicted to reach £9.8 billion.

Later life lending opportunities

As the appetite for homeownership amongst younger generations remains high, so does the need for more ways in which parents and grandparents can lend their support.

Equity release is one of the options available to over 55s, with products like lifetime mortgages growing in popularity following multiple product reforms to ensure consumer protection. As a result of ‘no negative equity guarantee’, flexible product features and average interest rates in 2021 as low as 3.95%, perceptions are shifting.

Five scenarios where equity release products could support first-time buyers

  1. Renting is money they’ll never see again - According to a report by the Equity Release Council, home ownership could deliver a financial advantage of £326,000 over thirty years compared with renting, by making lower monthly payments and building up their housing equity.
  2. Preferential mortgage rates – Whilst 90-95% mortgages do exist, there are fewer options available with less favourable rates. Putting down a larger deposit gives the buyer access to a greater choice of mortgage products.
  3. Getting it right first-time around –Some first-time buyers may not be ready to purchase a home until they’re nearing the point of starting a family, by which time, their property requirements may have a longer view in mind.
  4. Project properties – Many first-time buyers are not in a position to buy a property with spare funds to make costly renovations. However, a lifetime gift could enable them to take on a project property which may not have been an option for their initial search.
  5. A living inheritance they can actually see – The average person will receive an inheritance at the age of 61 years old. By this stage, many people are financially secure and lead a comfortable lifestyle so an earlier inheritance might be more useful. Using a lifetime mortgage will reduce an inheritance, and the recipient of a gift may have to pay inheritance tax in the future.

These are just a few examples of how equity release products can help younger generations get onto the property ladder. While later life mortgages have their benefits, they are not without their risks.

A lifetime mortgage is a loan secured on your client’s home and interest is charged on the total loan amount, plus any interest already added. The loan is usually repaid when the last remaining borrower dies or moves out of the home into long-term care. Your client may wish to pay some or all of the interest charged each month to reduce the overall cost of the loan. It may also affect any means-tested benefits your client is entitled to, and if your client has more affordable ways of borrowing available, these should be considered first.

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