In partnership with
Debenhams Ottaway
When making life decisions that involve property and family, getting legal advice is vital to help protect your assets and ensure you are fully informed.
“Whether you want to use the value of your home to fund your lifestyle aspirations or take out a joint mortgage with your child to give them a helping hand, it’s important to seek independent legal advice so that you understand the implications involved,” says Stuart Harries, a chartered legal executive and conveyancer at Hertfordshire law firm, Debenhams Ottaway.
With over 20 years’ experience in residential property, Stuart helps a diverse range of clients, including many wealthy individuals, on all aspects of sales, purchases, remortgages and transfers of equity. Below, he explains the benefits and drawbacks of some common financial planning tools related to property.
Q: What is equity release and how does it work?
A: Equity release is usually limited to people aged 55 and over who have paid off their mortgage or don’t have much left to pay. It’s a useful tool for individuals who want to have access to their home’s value, but don’t want to sell because they like where they live or want to stay close to friends and family. Equity release is a way of freeing up this value so they can use it for whatever purpose they want, whether it’s to enjoy retirement or for the benefit of their loved ones, such as paying for a grandchild’s school fees.
Q: What are the advantages of equity release?
A: The main advantage of equity release is that there are no instant repayments. If you are asset rich but your income is low, you don’t have to worry about finding the money every month to make a repayment. You can also borrow a large sum as the loan is assessed on the property itself and not necessarily on the individual or their ability to repay, which is often the case with a personal loan.
Q: What are the risks of equity release?
A: While it can benefit people in their lifetime, equity release can diminish someone’s estate once they pass away. The original capital sum is repaid when the house is sold and that normally occurs either when the borrower can no longer live there and must go into long-term residential care, or once deceased. The profits of the house sale will go to pay off the mortgage, including the interest, which can be substantial. If someone has specific gifts in their Will, for example, they can be affected because there may not be enough money left in the estate.
It’s also worth noting that the mortgage loan must be paid off in full if you wish to pass down a property through the generations.
Q: How can I take out an equity release loan?
A: Mortgage lenders will insist that the borrower receives independent legal advice before taking out an equity release loan because of the potential risks involved. As conveyancers, it’s our job to explain the implications and make it clear that there are alternative forms of borrowing available that could be more suitable for someone's overall financial position and estate; for example, downsizing could be a viable option.
We also need to make sure that the loan is for the borrower’s own benefit and that they are not doing it under pressure or duress.
Q: How can I help my child get a mortgage?
A: A parent who acts as a guarantor on their child’s mortgage stands in the background – they are the substitute if you like, and their liability only applies if there is a default on the mortgage.
However, there is another option available called a joint-borrower-sole-proprietor mortgage. This is where an adult child is the buyer of the property and their name goes on the title, but they take the mortgage out jointly with a parent or parents. The difference between this and being a guarantor is that the parents are responsible for the mortgage debt right from the start, even if there's no default. They are jointly borrowing, and the loan is assessed on their own ability to repay it without their child.
Q: What are the benefits of a joint mortgage with my child?
A: This type of mortgage can be beneficial if a young person is starting out in their career with earning potential but no immediate access to funds. The child can start their mortgage with the intention that once their salary increases, they can take the mortgage over and the parent's liability is released.
It also allows parents to use their earning ability rather than giving a lump sum, which they may not necessarily have. They can use their income to help their child and pay the mortgage off themselves without it becoming a gift or incurring any liabilities such as inheritance tax.
Another advantage is that the child can still benefit from any potential first-time buyer's stamp duty allowance.
Q: What are the risks of having a joint mortgage with my child?
A: The main downside is that the parents won’t benefit from any equity or increase in property value. Signing a joint mortgage is not an investment as such – it's purely helping their child get onto the property ladder.
Another potential disadvantage is that they can’t get released from the mortgage unless it’s paid off, which could be a risk if their financial position changes. Likewise, if the parents find themselves in a position where they want to take out another mortgage, they may not be able to.
It can also be inequitable if parents have several children, as they may not be able to stand as joint borrowers on all their mortgages. Another point to consider is that if the parent passes away, the debt could pass from their estate and can affect gifts they make in their Will.
How can we help
At Debenhams Ottaway, we provide personal advice and straightforward one-to-one consultations with our clients to ensure that they are fully informed about the obligations and consequences involved in big life decisions.
We can also help you with buying and selling your property and offer a premium service that suits clients with higher value property. We pride ourselves on our hands-on, client-focused approach. Our team of qualified legal conveyancers will keep you regularly updated on the progress of the sale, offer guidance every step of the way and is always on hand to answer any questions you may have, to make the process efficient, reliable and as stress-free as possible.
If you need legal advice on buying or selling your property, joint mortgages, or equity release, contact Stuart Harries on 01727 738221 or sh@debenhamsottaway.co.uk., or visit debenhamsottaway.co.uk.
