On March 2nd 2021 the International Longevity Centre hosted a panel discussion on the problems facing Generation X as they approach retirement. This follows on from their publication ‘Slipping though the cracks?’ in February, which emphasises the lack of, and therefore need to act on, saving towards retirement.
Our Later Life expert, David Forsdyke, explains how property and modern Equity Release products can help those who find themselves stuck between a rock and a hard place.
As a member of Generation X (Gen X) myself, I’ve felt it important to really understand the challenges of my generation. Many are caught in a financial vacuum between their parents and their children. I am generalising here, but our parents, the previous generation, are the last to enjoy significant and stable pension incomes from final salary schemes. Coupled with ever increasing life expectancy, this means the parents of Gen X are likely to live long and financially secure lives well into their 80s, 90s or even 100s. At the same time, it is our parents, the ‘Baby Boomers’, who currently hold the majority of property wealth in the UK. All this means the wealth tied up in property is not being passed on until Gen X are in their 60s or beyond.
Meanwhile the Children of Gen X (I have 4 of them!), the ‘Millennials’ and ‘Generation Z’, are struggling to purchase property of their own. Many are turning to their parents for help, as evident in Legal & General’s annual reports on the impact of the Bank of Mum and Dad on the property market. Even the recent 2021 Budget announcement from our Chancellor Rushi Sunak made reference to its efforts to turn ‘Generation rent’ into ‘Generation buy’.
But how can property and modern Equity Release products help?
- Talk to the parents and grandparents
If you’re with me in Gen X, your sons or daughters are likely to be looking to buy their first home. They may have saved 5% or even 10% towards a deposit. Yes, they can apply for a 90% or even 95% mortgage, but interest rates at this level tend to be high in order to offset the additional risk the lender is taking. Before they go ahead, I recommend you take a moment to talk to them and your parents at the same time.
If your parents can help out, perhaps by raising funds secured on their property using a Lifetime Mortgage, and give your son or daughter a 20% deposit, they will be giving them a huge advantage. An 80% mortgage will be considerably cheaper, with interest rates around 1% lower than at 90%, which will lower the monthly cost of the mortgage. Your children could offer to pay some or all of the interest on the grandparents' borrowing and still be spending less than if they’d taken a 90% or 95% mortgage. They could even pay off the loan over time, as most lifetime mortgage lenders now allow overpayments of at least 10% each year without incurring any penalties.
- Look at your own property
If you’re over 55, you could look at using Equity Release yourself, to provide a helping hand in two ways:
1. Borrow a lump sum. A simple injection of funds could help the children, or even address an immediate shortfall in your own finances. Interest rates for lifetime mortgages are now much lower than in previous years, so it may not be as costly as you think.
2. Set up a draw down facility. Sometimes referred to as a reserve facility, this is an amount pre-agreed when the lifetime mortgage is first taken out and allows you to withdraw (draw down) these funds regularly or on an ad hoc basis. You won’t pay any interest until you have withdrawn the money. This can work if you need to provide regular support to both your children and your parents, or to top up your own income.
- How to avoid the pitfalls
Consumer protection in this area is arguably much stronger than in the mainstream mortgage market. This is because products come with the following safeguards;
- The FCA have put in place rigorous advice requirements
- The Equity Release Council apply rules and standards across the industry
- Advice must come from a fully qualified adviser
- Advisers must follow a comprehensive advice process, which explores the advantages and disadvantages, as well as the options and alternatives
- Borrowers will receive a detailed explanation of how the mortgage works. A lifetime mortgage normally allows interest to roll up. So, unless you or your children choose to pay the interest for them, the mortgage you or your parents take will gradually get bigger over time and it is important to understand how this works
- A good adviser will have a discussion about the future, to make sure your grandparents have thought about what they might need, for example, have they enough to cover the cost of care
If you're thinking about equity release for you or your parents, speak to a professional. Knight Frank Finance are members of the Equity Release Council and we have an experienced team of Later Life Finance experts. We are not tied to any providers and will cater our advice based on your unique situation. We will never pressure you into making a decision. Sometimes our advice is to avoid Equity Release.
David runs the Later Life Finance team at Knight Frank Finance and is a recognised expert in this field. If you would like to talk to David or a member of his team please get in touch by email david.forsdyke@knightfrankfinance.com or by calling 01483 947764.