Plan your future property needs

This article is part of
Guide to Family Financial Planning

Plan your future property needs

The so-called ‘squeezed middle’ (the group whose income is too low to keep them comfortable, but who do not qualify for state assistance) have their financial challenges.

However, many are owners of substantial wealth in their property, due to rises in house prices over the years, and low borrowing costs.  

And it seems they are increasingly accessing this wealth.

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The FCA’s Mortgage Market Study (May 2018) showed that lifetime mortgages, the main form of equity release, made up 1.5 per cent of all mortgages arranged in 2016, showing growth of 12 per cent per year between 2012-2016.

More recent FCA figures show that lifetime mortgages have further increased, comprising 1.73 per cent of all mortgages arranged.

But the squeezed middle may be using property wealth in their role as ‘The Bank of Mum and Dad’, to get their children onto the property ladder, or for other family requirements.

As financial planner Scott Gallacher of Rowley Turton in Leicester has observed: “It’s definitely happening, that people are using property wealth to fund their children’s needs.”

This reflects findings by Legal and General’s 2018 The Bank of Mum and Dad research that nearly 60 per cent of property owners under 35 had got help to buy, courtesy of family and friends. After all, the average loan for a first-time buyer in the UK is a sizeable £163,507, according to UK Finance’s Lending Trends (February 2019).  

However, making use of property wealth to support family members could have an impact on children’s inheritance prospects, as it is possible that once the mortgage is paid off, there may be no equity left.  

Also, putting their own financial needs to the back of the queue is not an ideal solution for the middle generation, as Mr. Gallacher explains: “This means that some parents are going without, themselves and can’t fund their own retirement.

"All they can do is work longer. Everyone starts off thinking that they will retire by the time they reach the age of 50 or 55, but if they are taking money out of their property, this retirement date may be too optimistic.”

Mr. Gallacher also suggests looking at the issue from a different angle, as an alternative: “Perhaps parents should just be less generous towards their children. One of the mistakes people make is to sacrifice their own needs for those of their children, leaving them unable to retire when they would like to.”

Financial adviser, Malcolm Steel, of Mearns & Company in Edinburgh takes a similar view: “Parents should focus on their own security first so that any gifts to children should be made without jeopardising their own financial situation.”

The importance of planning

There is a clear, practical remedy for avoiding using property equity for funding children’s financial needs, as Mr. Gallacher points out: “The average person spends most of their earnings. Instead they should start planning how they are going to fund their children as soon as possible.