Young adults have found themselves priced out of the property market, continuing to live at home or rent. A significant number are turning to their parents and requesting help from the bank of mum and dad to raise funds to get on the first rung of the property ladder. However, not all families have access to surplus savings, so what are their options?
Parents can consider a lifetime mortgage as a means of raising funds to support their adult children with a house deposit.
A lifetime mortgage is a mortgage taken out on a property and usually does not have to be repaid until the borrower dies or needs to go into long-term care. The lifetime mortgage allows you to unlock some of the equity that you have accumulated in your home, without having to sell your home.
The loan amount depends on your age and how much your property is worth, and the homeowner must be a minimum age of 55 years. It is not mandatory to make monthly repayments.
However, before gifting monies to young adults, parent should consider the tax implications of making such a gift. Smaller amounts can be given tax free, but larger amounts may be subject to tax.
It is important to understand the annual tax-free gift allowance and any potential exemptions that may apply. Parents should also consider whether a postnuptial agreement is appropriate if the party receiving the gift is married. This can provide legal protection and clarity in the event of divorce.
Alternatively, a declaration of trust can be utilised to record financial contributions to a property purchase and document how the property will be sold and divided in the event of separation or divorce. It is important to seek legal advice to ensure any gifting arrangements are legally sound.
Parents must also consider the impact of the lifetime mortgage on their estate. Lifetime mortgages do not require regular monthly payments, meaning the interest charged on the loan amount will compound over the lifetime of the mortgage. This means that your beneficiaries could end up without any inheritance from your property once you pass away or have moved into long-term care.
Specialist legal advice is essential before taking out a lifetime mortgage because it ensures that the borrowers fully understand the legal implications of the transaction. It is important to choose a solicitor who is experienced in lifetime mortgages and ideally is a member of the Equity Release Council.
Such membership demonstrates that your solicitor follows the strict equity release code of conduct and professional standards. Your solicitor is expected to explain the terms and conditions of the lifetime mortgage, the potential impact on inheritance and the rights and responsibilities associated with the mortgage.
Lifetime mortgages are complex financial products that involve significant legal documentation and requirements. Independent legal advice acts as an extra safeguard ensuring borrowers can make an informed decision without undue influence from their financial adviser or a third party.
The ERC mandate that all lifetime mortgage applicants receive independent legal advice to protect their interests and ensure a smooth and timely transaction.
In summary, a lifetime mortgage can be a useful tool for parents to unlock equity in their homes, whilst continuing to live in them, however, it is critical to weigh the benefits against potential risks and long-term impacts on your estate.
It is essential to take advice from experienced legal advisers who can expertly guide you through the process.
Catherine Banks is a partner in the real estate team at SA Law
