24 August 2018

Should clients downsize to help grandchildren?

Our latest ‘Bank of Mum and Dad’ (BoMaD) research shows the vital role parents and other family members play in helping children get on, or move up, the property ladder.

More than one in four housing transactions in the UK are dependent on the BoMaD, but how should your clients go about helping their loved ones?

The BoMaD this year will lend the equivalent of a £5.7bn mortgage lender. Funding from friends and family is supporting 27% of all property sales in the UK.

Many generous grandparents want to help their family get a foot on the property ladder. In the main, they have found the money by dipping into cash savings, using their pension savings or downsizing their own home. However, nearly one in five admits they’ve had to accept a lower standard of living, such as cutting back on a holiday or postponing a car purchase, as a result of lending the money. 10% of the BoMaD admitted that their generosity had left them feeling less secure about their own financial future.

The real cost of downsizing

Downsizing may seem like the obvious solution, when savings are harder to come by, but that’s not a cheap option. The cost of stamp duty, removal costs and solicitors’ fees can run into many thousands of pounds. The emotional cost can also be high. Moving home is rarely stress-free at any age. For older homeowners with an established social circle, and possibly family nearby, downsizing could force them into moving out of the area. It may not be possible to get an affordable, smaller property without moving away from the place that they know and love. The true cost can be a sense of isolation. So for many, downsizing won’t be an appealing option.

One tool that remains significantly under-utilised, is equity release. Our research found that just 4% of over-55s have used equity release. However 39% say they might consider it, and nearly half of those say they would put the money towards the purchase of a loved one’s home. Given that almost £1 trillion worth of housing wealth is owned by UK homeowners over 55, there is considerable potential funding for the BoMaD.

Our customers Gill and Jim used a lifetime mortgage to help their granddaughter buy her first home.

Gill and Jim's story

Gill and Jim's story video

This is Gill and Jim's real life story of how a lifetime mortgage made a difference to them.

Transcript: Gill and Jim's story

Running time:

Gill: My name’s Gill.

Jim: I’m Jim.

Gill and I have been married fifty odd years, fifty-two…

Gill: Fifty-two.

Jim: Fifty-two years in March.

Gill: In a couple of weeks yeah.

Jim: Always lived round here ain’t we and our families grown up with us.

The reason that we wanted to get the lifetime mortgage.

Was to help a member of our family which our granddaughter and put their foot on the ladder as they say.

Gill: Our granddaughter was you know looking for a house and no way could they save the deposit.

Which that’s the reason we did it for her.

Jim: We really wanted the granddaughter to have the chance that we had it’s a really, really nice feeling to be able to do something…

And your using the value of your house, to help your family and that’s what it’s all about.

On screen text: A lifetime mortgage will reduce an inheritance. If you give the money away, the recipient may have to pay inheritance tax in the future.

Jim: With regards to concerns with a lifetime mortgage, we never had it, did we?

We did ask a few questions obviously because it’s something that you really want to know that you’re doing the right thing.

Well the advisers were excellent weren’t they really.

We knew the questions we wanted to ask and they had the answers to put us right to put us at ease.

When we talked to our daughter about it , which we felt you had to do.

She was all for it straight away. There was, there was no hesitation at all.

The granddaughter, it was joy wasn’t it.

It was just as though a weight was lifted off of them you know and then they could suddenly see this was their chance.

Gill: She did say to us first of all are you sure you don’t want it or want some of it

You know but we thought well we’d rather see them happy now.

Then have it when we’re gone and we can’t see it.

The hug I got from my granddaughter was well worth it.

On screen text: A lifetime mortgage, a loan secured against your home, lets you take money from the value of your home without having to move.

Before you can take out a lifetime mortgage, you’ll need to speak to an adviser to discuss your options and the implications for you.

For example, we charge interest on the loan plus any interest already owing.

This means the amount owed grows quickly, leaving you with less equity in your property and reducing any inheritance.

It could also affect any state benefits you receive.

We believe in the importance of seeking professional advice before releasing equity. Only 23% of BoMaD lenders took advice before deciding to support their family member’s purchase. For those that did, only a little over half got professional advice.

Tellingly though, of those that did, 73% said it gave them added confidence in their lending decision, while 30% said that they were able to secure a more favourable deal. Professional advisers play a critical role in weighing up the best options for their client and their families.

See how equity release could help your clients in this situation

Lifetime Mortgages