Should you release equity from your home to pay for your grandchild’s house deposit?

As house prices continue to rise, combined with the withdrawal of many first-time buyer deals from the mortgage market, it is currently a very challenging environment for those looking to take their first step onto the property ladder. Grandparents with grandchildren struggling to get the deposit needed to secure a mortgage on their first home may be tempted to help out by releasing equity from their own home to pay towards the deposit.

Here we take a look at whether grandparents should consider releasing equity from their home to help pay for their grandchild’s house deposit.

The money released from equity release can be used in any way the homeowner chooses, which means that it is possible to use it towards a house deposit. In fact, equity release can be a good way for those with equity in their home to give their grandchild their inheritance early and give them the help they need now to get onto the housing ladder. Those considering equity release should be aware that it can have a long-term impact on their finances and should be considered carefully before being taken out – as such, those considering equity release should speak to a qualified equity release adviser. For more information about equity release and how it works, visit our Equity Release page and our Equity release FAQs.

Many lenders still allow first-time buyers to use money that has been gifted as a deposit, with mortgage affordability still the key requirement as to whether a mortgage application is approved or rejected. Saying this, last month Nationwide stated that it would temporarily not give mortgages to first-time buyers who cannot prove that they have saved three-quarters of their deposit themselves, but this does not apply to those with a 15% deposit or more. Although no other lender has, as of yet, followed Nationwide, many lenders have withdrawn mortgage deals aimed at first-time buyers with a 10% deposit or less. This means that first-time buyers looking for a bigger choice of deals should consider aiming for a minimum deposit of 15%, which would enable them to look at mortgage deals at an 85% loan-to-value (LTV).

The amount of equity that can be released from a home normally ranges from 20% to 50% of the property’s value, but the exact amount will depend on the equity release provider chosen and the specific product selected. In addition to this, usually, the older the homeowner, the more equity that can be released. Homeowners should be aware that interest will be added to the equity released from their home, which, depending on the type of equity release, will be paid back once the homeowner has gone into permanent care or has passed away, or, alternatively, the homeowner can choose to pay back some or all of the interest due on a monthly basis during their lifetime.

A grandparent wanting to help more than one grandchild with the deposit for their first home should consider an equity release plan that offers drawdown. This is because a standard equity release plan will normally only allow one lump sum to be taken, but with an equity release drawdown option, further amounts can be withdrawn at a future date. The overall amount available for borrowing will be agreed when the initial equity release is taken, but has the benefit of not paying interest on the subsequent lump sums until they are withdrawn.

Grandparents who want to help their grandchild buy their first home but who do not want or are unable to use equity release, can consider a guarantor mortgage instead. Guarantor mortgages work almost the same way as a standard mortgage, but require a close family member of the borrower to use their house as security against the mortgage. There are some guarantor mortgages that allow first-time buyers to purchase a property without a deposit or at a 100% LTV, although borrowers considering this should consider the risk of negative equity. Alternatively, some, such as Barclays’ springboard mortgage, are available to those with just a 5% deposit.