Equity-release products have a mixed reputation. These schemes allow older homeowners to tap the equity in their houses to meet living costs, and can be associated with high interest rates or exit fees. It’s no wonder that people try to find a way around the problem, often by asking family members for help. In one alternative option, parents gift a property to their children, who take out a mortgage on it, and give this money back to their parents. However, there are several pitfalls associated with this route, says Naomi Rovnick in the Financial Times.
Firstly, the loan would not be considered a standard buy-to-let mortgage. Because your children would be renting the property to a close relative, it would instead be treated as a residential mortgage, and so they would be subject to strict affordability requirements. Assuming that you won’t be paying market rent, it might be difficult for your children to demonstrate that they can afford the mortgage payments. Lenders may also require a higher deposit than normal. These mortgages are often “very hard for lenders to approve”, says Aaron Strutt of broker Trinity Financial.
Secondly, it is somewhat problematic to put your biggest asset in the hands of an external party, warns Alison Treharne of Shore Financial Planning. Presumably you trust your children not to kick you out, but there is no guarantee that they will also be in a position to cover the mortgage on the house you live in.
Finally, there are inheritance tax (IHT) implications to this transfer of property. If you give your children your property outright, it will still be subject to IHT unless you pay rent at the going rate, pay your share of the bills and live there for at least seven years.
If this option is appropriate for you and your family, there are some products available from smaller banks and building societies, including the Melton Mowbray and Mansfield building societies. But for many people, it would be better to consider other options. Beyond the obvious solution of downsizing or radically decreasing outgoings, one option would be to take in a lodger. You can now earn up to £7,500 tax-free per year from letting out a room in your house.