Who finances the bank of mum and dad?

Legislation has transformed the market says Peter Boyd

In recent years, we’ve seen the emergence of the bank of mum and dad in providing a vital helping hand for many first-time buyers.

But as finances for older people become squeezed it could be said that the bank has lost its AAA rating and families have struggled to get the money together for deposits.

However, a recent and important change in the mindset of Scottish property owners – to recognise the value of equity release – is beginning to unlock the potential for older homeowners to take advantage of previously hidden property wealth.

Plans for equity release in Scotland, where homeowners can cash in, tax free, on the value of their properties while maintaining ownership, have increased almost 40 per cent on figures for last year.

This equates to some £21 million worth of cash according to Key Retirement’s Market Monitor, a quarterly review of the UK’S equity release market.

And with an average release value of £42,379, owners are taking the opportunity to make the most of wealth amassed over the years.

While some use the cash for home improvements, 22 per cent of owners in 2016 who took this option have said they passed cash on to family and friends to help them on to the property ladder.

Scots are recognising that equity release has moved on hugely from the previously poor reputation that it had, thanks to new legislation and regulation.

One big change is the no negative equity guarantee which means the amount to pay back is fixed.

In other words, the loan plus the interest can never be higher than the value of your home, even if the actual value of the home takes a turn for the worse, and your estate will not be liable if the amount left over is not enough to pay for the loan.

So when the time comes for you to leave the house, your dependents will not be faced with extra debt.

Anyone taking out a plan also has to meet face-toface with an independent solicitor to ensure they are fully aware of all aspects of the service.

In the UK there were 8,604 new equity release plans in the first quarter of this year – again up on the 2016 figure.

That’s £663.3m of equity cash released with the potential to transform the lives of families.

The evidence is clearly pointing to equity release being viewed as a mainstream retirement product for older homeowners.

Indeed, it may be best to consider equity release as a “lifetime mortgage”, where eligibility is assessed on an actuarial basis, the same as for insurance, rather than financial means. So older people or those with poor health get better rates.

On average, mortgage capital counts for around double the pension pot of most retirees so it is an odd situation we find ourselves in where homeowners downsize to cash in on their savings – sacrificing what is by far their biggest potential source of wealth.

The reality is that anyone who owns a home bought with a mortgage has effectively been “saving” throughout their lives.

As house prices and costs of living continue to rise, children and grandchildren are increasingly looking for help. Equity release offers this in a safe and sensible way during trying times.

Many of us have been saving for decades whether we realise it or not and equity release can be an unforeseen reward for that hard work.