Equity release to help first time buyers: how does it work?

How lifetime mortgages can help people get onto the property ladder

Written in line with our editorial policy.

Homeowners aged 55+ can use equity release to help family members onto the property ladder. The money you release can help fund a deposit for their first home.

There is a great deal of financial pressure on many of us these days, but prospective first-time buyers may be finding it especially challenging to buy a property following the recent mortgage hikes.

Perhaps you have younger family members trying to get on, or move up, the property ladder. If so, it can be frustrating to have property wealth but not the available cash to help them find a big enough deposit. 

The good news is that equity release could give you the access to the money they need. To explain how homeowners can use equity release to help first time buyers onto the property ladder, we have put together the following information:

• The challenges facing first-time buyers
• Can equity release help first time buyers onto the property ladder?
• How does an equity release plan work?
• Who is eligible for equity release?
• Payment options for equity release for first-time buyers
• Risks and benefits of equity release to help first-time buyers
• Finding the right equity release adviser

We hope this article will help you understand more about using equity release to help first time buyers. For further information and advice, please don’t hesitate to contact our friendly selected equity release advisers.

Simply call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment with an adviser for you. Alternatively, check your eligibility and get an initial indication of how much tax-free cash you could unlock.

The challenges facing first-time buyers

First time buyers have been having a particularly difficult time. A recent article by the Daily Mail reports that first-time buyers are up to £9,000 a year worse off compared to if they’d bought the same property a year ago. 

Apparently a ‘double whammy’ of the Help to Buy scheme ending and mortgage rate hikes has seen monthly repayments rise to an average of £1,389 a month. That’s an extra £354 compared to last year. The figures are based on a typical £250,000 home that a first-time buyer purchases outside London.

Unsurprisingly, analysis from property firm Savills also shows that 46% of first time buyers had family assistance in getting their mortgage during 2022. That is expected to jump to 61% in 2023.

For many first time buyers, the increased monthly costs for a mortgage are simply unrealistic and unachievable. If you have younger family members dreaming of being first-time buyers, equity release could make their dreams a reality.

Can equity release help first time buyers onto the property ladder?

Yes, homeowners can use equity release to help a child buy a house – or other family members for that matter. In fact, providing financial support to loved ones has long been a popular reason for equity release, with some later life homeowners specifically arranging a plan as a means of intergenerational wealth transfer.

The money you release can be given as a gift for a deposit to help them onto the property ladder. You might wish to provide the full deposit they need, or top up what they already have in order to secure a mortgage on their new home.

By boosting the size of their deposit, you may even be able to help your family member secure a much better deal on their mortgage deal. This could potentially save them thousands of pounds in interest over their mortgage term.

How does an equity release plan work?

An equity release plan allows homeowners aged 55+ to release some of their home’s value without having to sell or move house. A lifetime mortgage is the most popular type of equity release plan today and is available as a lump sum or drawdown plan.

One of the biggest benefits of equity release is that there are no mandatory monthly repayments to make on the loan. This is because the loan plus interest rolls up each month until the plan comes to an end. This is typically when the homeowner/s pass away or move into long-term care. 

Customers can make voluntary payments up to a certain amount each year to reduce the interest accruing, but there is no obligation to do this. 

Looking to release equity from your home? Our selected advisers can provide all the information and quotes you want from the comfort of your own home. Call 0808 178 3055 or request a call back today to arrange an appointment.

Who is eligible for equity release?

To be considered for a lifetime mortgage you must:

• Be 55 or over (this applies to both of you if a joint application)
• Have a home in the UK worth £70,000 or more
• Be mortgage-free or have a small mortgage which can be paid off by some of the money you release

If you meet the above criteria then you can use our free online equity release calculator to see how much you could unlock from your home.

Not yet 55? There may be other ways to release equity if you are under 55.

Payment options for equity release for first-time buyers

If you choose to arrange equity release to help first time buyers, you may be wondering whether you can pay back any of the loan or interest early.

Equity release interest on a lifetime mortgage is typically left to roll up for the life of a plan. But if you are able to make full or part interest or loan repayments, you can reduce or prevent interest from accruing.

These payment options include:

• Arranging an interest-only lifetime mortgage. If you pay off your interest every month for the life of your loan, it will never grow in size.
• Making ad-hoc voluntary payments. You can make payments on your loan as and when you wish, up to a certain amount each year, without incurring any early repayment charges. Penalty-free payments of up to 10% of your overall loan each year are typically allowed by providers.
• Pay back your loan in full early. You could repay your loan early to prevent any further interest from accruing. You would need to consider early repayment charges, although some providers waive these in certain circumstances. 

Another thing to bear in mind is that it is not unusual for older family members to lend a deposit for a house purchase with the condition that the younger relative returns the money when they are able to. For example, repayment may be possible when they sell their home to move up the ladder. If you are considering this arrangement, make sure you seek legal advice first to protect your financial interests.

Risks and benefits of equity release to help first-time buyers

Thinking about unlocking some money to provide financial support to a family member? There are some pros and cons of equity release to consider first. These include:

Benefits of equity release

• You can unlock the money you need without having to sell or downsize your home.
• You can continue to live in your own home for the rest of your life, or until you move into residential long-term care.
• No mandatory monthly repayments as your overall loan is eventually paid back through the sale of your home. 
• You can move (‘port’) your plan to a new home if you wish to move house in the future,  providing your new home meets suitability criteria. 
• The ‘no-negative equity guarantee’ means you or your beneficiaries will never owe more than the value of your home. This will be of reassurance to those who have been put off by the equity release horror stories of the 1990s.

Risks of equity release

• Equity release will reduce the value of your estate and the amount of inheritance you leave to your family.
• The loan amount can grow quickly if you leave the compound interest to roll up.
• Equity release may affect your entitlement to some means-tested state benefits.
• There may be early repayment fees to consider if you wish to repay the loan plus interest early, although some lenders waive these in some circumstances.
• When you give some of the money you release to family or friends as a gift, they may be liable to pay inheritance tax if you pass away within seven years.

You can read more about the pros and cons of equity release here.

Finding the right equity release adviser

Are you considering equity release to help a child buy a house? The best way to search for the right plan for your individual needs is by speaking to a fully qualified equity release adviser. 

Here at Equity Release Wise, we can connect you with our selected advisers to:

• Check your eligibility and see if a plan would be the best financial option for you.
• Search for the most competitive equity release quotations.
• Explain all the pros and cons of each type of plan you are considering.
• Help you decide which plan best suits your unique wants and needs.
• Expertly guide you through the application process.

Our selected equity release advisers are ready and waiting to help you explore your equity options and find the best plan for your needs. Please call 0808 178 3055, or request a call back for a time that suits you to arrange an initial appointment.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn