It will come as no surprise that it’s older homeowners who are helping loved ones with their property dreams. Whether it’s helping them onto the first wrung of the ladder or assisting with the purchase of a larger home to accommodate growing families, without this help younger people would be unable to purchase property. And with reports suggesting UK houses now cost almost eight times more than average earnings, it looks like this need for help will continue.
House deposit help
If you’re looking to buy a property, the minimum deposit for a mortgage is usually around 5%, although given current market climates, and the reduction in high loan to value mortgages, lenders are asking for at least 15%. This means first-time buyers need an additional £12,000 just to be considered by a lender.
When it comes to deposits, the bigger the better. This is because it’s a safer investment for a mortgage lender – and with a market crash looking imminent, house prices over the next few years could plummet. In addition, with a bigger house deposit, the interest rates will be lower.
In a recent study conducted by Key, who specialise in equity release, they found that older homeowners used the majority of their property wealth to help loved ones with a house deposit, totalling £230 million in 2020.
Financing by early inheritance
The study also revealed that around a quarter of equity release was used for early inheritance. One of the biggest reasons early inheritance is popular is because it can reduce the amount of inheritance tax that is due. Currently, inheritance tax (IHT) is set at 40% on the estate – property, money, and possessions, and applies to assets of an estate above £325,000 (£650,000 for married couples or civil partners).
If you make an ‘early inheritance’ gift seven or more years before your death, the recipient won’t have to pay IHT, as long as you gift less than £325,000 within the seven year timeframe. However, if you die within those seven years, there’s a sliding scale of liability. For example, if you died within three years, they’d have to pay 40%, and 24% if it was between four and five years.
Who needs it the most?
Unsurprisingly people who live in expensive areas, like London and the South East received the highest amounts of money, with the biggest gift of £133,561 given in Q3 last year. Similarly, poorer areas like Wales and the Midlands saw the greatest proportion of gifting used for house deposits. This is mainly because wages in these areas are traditionally lower than the national average, but house prices are still in line with national averages.
Will Hale, CEO at Key, notes that:
“Helping out family and friends has always been a major motivator for older homeowners … our data suggests that while customers have focused on using their property wealth to shore up their own finances….they are still looking to support their families rather than spending money on themselves.”