PropertyMay 16 2019

Plan your future property needs

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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.

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.

"As soon as they have children, they should start putting away money separately, for university, property or weddings, so that this does not impact on their financial position. It is a matter of common sense and developing good habits.”

Mr. Gallacher concludes that affordability is a key consideration: “There is no magic money tree, to use Theresa May’s expression.

"In other words, there is no magic solution to create free money.” Mr. Steel agrees: “While cashflow planning is a powerful way of showing various scenarios before decisions are made, there is just no silver bullet for this dealing with this issue.”

Creative solutions 

While careful and effective planning, and realistic decision-making is key, to avoid releasing equity from property for children’s financial needs, creative thinking can provide other potential options too, as IFA Nick McBreen of Worldwide Financial Planning in Truro points out:

“People have many financial needs – for retirement, their children and other dependants, so they are looking at the locked-up capital in their house as a solution. But there are other possibilities they can consider.

“First of all, they need to get advice before they take any decisions. Mistakes can happen, otherwise.

"They also need to get over their ‘obsession’ about paying fees for advice and recognise that this advice will help them and their children.”

And then they can think laterally about the issues, and take action that keeps property wealth – avoiding an impact on the children’s inheritance, as Mr McBreen adds: “Some people are not aware of how much wiggle room they have, when it comes to what they can do with their house.”

“For instance, one solution I’ve seen clients apply is simply to swap house with your children. This means they get more room for their growing family and you get a smaller property that better suits your needs. There are legal fees, but the level of support this obtains for your family is immense.”

Another example of creative thinking for generating cash from your home, without denting the future inheritance is by making use of the government’s Rent a Room scheme, which allows earnings of up to £7,500 tax-free, from letting out furnished accommodation in your property.

As Mr. McBreen points out: “You can rent a room in your house out and gift the income to your children.”

Before making any choices though, he emphasises the importance of getting good advice first, as he concludes: “People need to have a plan and guidance, or they can end up in a horrible mess.” 

Fiona Nicolson is a freelance journalist