Will Your Parents Suffer in the Wake of Generous Financial Gifts?
It has been revealed that homeowners are accessing the equity from their homes earlier in their lives than ever before, so that they can see their children enjoy a financial gift before they pass away.
Figures from equity release specialist Key Retirement Solutions show that the average age for home owner equity withdrawal is now 67 years, whereas it was 71 years just five years ago.
Although the sentiment of a mother and/or father helping out their children’s bank balances is pleasant enough, early housing equity loans could be disastrous for some parents considering that medical advances are pushing up the average life expectancy.
This means that whilst someone might think it is a good idea to access the money wrapped up in their property at the age of 60 years, they could have another two or three decades left, which could be financially tough due to such early equity loans. This could see the person having to rely on additional loans and/or the use of credit cards in order to survive.
How do property equity loans work?
Loans can be taken out against the value of a property by the person who owns said property and this is called an equity release. Such loans can be paid in a lump sum or in monthly installments. When the homeowner/s passes away, the remaining debt is recovered through the sale of the property.
The sum loaned can never exceed the property’s value and the owner of the property cannot be forced to leave their home, even if they have borrowed the entire value of the property (and this arguably makes borrowing more attractive).
What are mums and dads using housing equity releases for?
Key Retirement Solutions told the BBC that the average housing equity loan is £20,000 but also said that it is not uncommon to see withdrawals exceeding £50,000. These large sums are usually used in the following ways by parents:
- Helping their children make it on to the increasingly expensive property ladder;
- To pay for their child’s wedding;
- Early inheritance gifts to their children and
- Servicing their own debts.
Your parents might well own a house that has a value ten times greater than a £20,000 loan but even what someone considers to be a small withdrawal now can have a major negative effect later.
Many people forget that equity loans taken out against a property compound a constant interest rate and as such, the large majority of loans will double every ten years.
If someone owns a property worth £145,000
…and they take out an equity loan of £29,000 at the age of 65
…then by the age of 89, they would have rung up £130,000 worth of debt (just £15,000 below the original value of the property).
Should a financial emergency arise for mum and/or dad in their eldest years, they might not have any monetary contingency since they already passed a large proportion of their fail-safe wealth onto their kids.
Although the OAPs in question might struggle financially due to their early equity gifts, I feel that passing on wealth whilst still alive is a great idea for two reasons. Firstly, we are currently in the midst of a tough financial climate which means the younger generations will find it hard to finance getting on the first rung of the property ladders and/or to meet university fees – the usefulness of property equity loans is undeniable! Also, inheritance tax sees any remaining wealth of a deceased party deducted by 40% – the less wealth that remains, the lesser the value of this deduction so early financial gifts can be beneficial to the overall amount inherited.
Parents need to make sure that they have some money out side for their old age needs…and that they do not give their equity gift to their offspring too early!
The author of this guest post – Kat Black – has seen far too many pensioners turn to the use of credit cards in the wake of giving equity gift too early in their lives.