How Parents Can Use Equity to Help Kids Buy a Home

What is Home Equity?

Home equity is the portion of your home that you own outright, free of any mortgage debt. As you pay off your mortgage, or as the value of your property increases, your equity grows. Parents can use this equity as a valuable financial tool to help their children get onto the property ladder.

Equity Release to Provide a Deposit

One of the most common ways parents use their home equity is through equity release. This process allows you to access the value locked in your home without having to sell it. The funds can then be gifted or loaned to your children to use as a deposit for their own home. Equity release can provide a substantial deposit, making it easier for your children to secure a mortgage and, potentially, better interest rates.

Remortgaging to Release Equity

Remortgaging your home is another way to access your equity. By replacing your current mortgage with a larger one, you can borrow against the value of your home and release funds. These funds can then be used to help your child with their deposit or other home-buying expenses. Remortgaging might offer better terms than an equity release plan, especially if interest rates are favorable. Mortgage One can guide you through the process of remortgaging to ensure it aligns with your financial goals and your child's needs.

Joint Mortgages Using Equity

Parents can also use their equity to help secure a joint mortgage with their child. In this scenario, the equity in your home is used to help with affordability or to guarantee a portion of the loan. A joint mortgage can help increase the amount your child can borrow, making it easier for them to buy a home in more expensive areas. Mortgage One specializes in advising families on how to structure joint mortgages that balance the financial needs of both parents and children.

Family Offset Mortgages

A family offset mortgage allows parents to use their savings or equity to reduce the interest on their child's mortgage. By placing savings into a linked account, you can effectively reduce the amount of the loan on which interest is charged. This helps your child pay off their mortgage faster or lower their monthly repayments, without the need to release equity directly. Mortgage One can help explain how family offset mortgages work and if they’re a viable option for your family.

Gifting Equity

Some parents may choose to downsize their home or sell an additional property and gift the equity to their child. This is often a larger financial gesture, but it can make an enormous difference in helping children secure their own home. When gifting equity, it’s important to consider the tax implications, such as potential inheritance tax if the parent passes away within seven years of making the gift.

Risks to Consider

While using equity to help your child buy a home can be a great financial move, it's important to understand the risks. Releasing equity through remortgaging or equity release increases your debt and may affect your financial security in retirement. Additionally, gifting large sums can have tax implications. Mortgage One can provide expert advice on balancing these risks, ensuring you make a decision that’s right for both you and your child.

Conclusion

Helping your children buy a home by leveraging your home equity is a generous and effective strategy. Whether through equity release, remortgaging, or joint mortgages, there are multiple ways to support your child’s homeownership dreams. At Mortgage One, we’re here to guide you through these options, ensuring both you and your child are set up for financial success.