Added: April 2021
Equity release is not the only route to gifting a deposit, says Ipswich Building Society
Supporting children, grandchildren or other family members onto the property ladder is becoming increasingly popular and in many cases necessary due to house price inflation but Ipswich Building Society cautions borrowers to look beyond equity release, and suggests there are other ways to fund a gifted deposit.
Charlotte Grimshaw, Head of Mortgages, at Ipswich Building Society said: “Many people over a certain age tend to think that equity release is their only option if they want to borrow against the value in their home – it’s almost like a conditioned response. We want borrowers aged fifty-five and over to know that the mortgage market has moved on massively since the rigid age caps of over a decade ago and they may find that a standard residential mortgage is better suited to gifting a deposit whilst still allowing them to stay in their family home and in control of the inheritance they want to leave behind.”
Work and income in later life
Ipswich Building Society believes that many mortgage providers, particularly those who undertake a manual lending approach rather than an automated one, are now in a position to better understand the finances of more mature applicants.
Grimshaw continued: “In most cases, early retirement isn’t a switch that is suddenly flicked on. People in their 50s, 60s, 70s and even 80s may work part-time so it is often more of a gradual winding down, and of course, some people can’t afford to or don’t want to stop at all.
“And the same can be said for retirement income – it’s not simply a case of switching a pension pot for an annuity, there are now many variations of income and investments in later life that need to be taken into consideration, such as a company director continuing to receive income after retirement or being paid a fee for consultancy services. As an industry, we’re much better at understanding all of these nuances than we were, which leaves the door open to a greater number of mortgage options and choices for these generations.”
Benefits of ‘later life’ standard mortgage borrowing
Ipswich Building Society suggests that later life borrowing via a standard mortgage warrants consideration for those gifting a deposit and who can afford to make repayments.
● Standard residential mortgage rates for older borrowers are typically lower than equity release rates as a whole and, although the gap is narrowing, this can make thousands of pounds difference to the borrower.
● Later life is only an agreement for the selected term of the mortgage – they tend to have shorter tie in periods so the borrower isn’t tied in ad infinitum, and can choose how long to borrow the money over.
● By remortgaging, borrowers can change their later life mortgage deal to a new provider at the end of their deal period, so are not tied into any one provider or product for the life of the mortgage term.
● If later life mortgage borrowers come into an inheritance, they would be able to make overpayments or repay the loan, subject to the terms of the agreement with the lender. As equity release products are designed for the remainder of life, providers can make it more difficult and more expensive to arrange repayments.
● Later life borrowers can choose to make interest-only or capital & interest repayments, which means that the interest doesn’t compound or roll up as it can do with equity release (which can potentially impact the remaining equity in the property).
● Whilst it is possible to move house under an equity release scheme, the homeowner will need to get approval that the new property meets the provider’s criteria. With later life, the homeowner remains in complete control of their estate and is completely free to move or downsize because of a change in circumstances such as ill-health.
RIO – another equity release alternative
RIO – Retirement Interest Only – is a specific form of later life lending with no set term where the borrower repays the interest each month and can remain in their home without the burden of worrying about repaying the capital until a significant life event (such as a move into long-term care or death of the last remaining borrower). This gives older borrowers another option alongside standard later life borrowing and equity release.
Grimshaw concluded: “Later life products are probably lagging behind equity release in terms of public recognition, in part due to the fact that different lenders use different terminology, whereas equity release has a stronger identity but mixed reception. However, borrowers and intermediaries should investigate all options before settling on the best method that allows homeowners to release capital from their property to gift a deposit.
“We’ve witnessed many later life borrowers starting the conversation around gifting a deposit for their offspring but then also deciding to free up some equity for their own home improvements too. It’s important that this group understand that mainstream mortgage providers do want to lend to them and that equity release is not their only option.”