Alvin Hall: Could the bank of mum and dad go bust?

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Many parents are accessing the equity in their homes and pensions to pass on wealth to their children while they are still alive, but with people living longer, could they be leaving themselves financially vulnerable in later life?

Sixty-five-year-old Jon Rees bought his former council house in Plymouth in the 1990s and like many people in Britain, sat back and watched the value of his home go up and up during the housing boom.

Today, he is capitalising on the increased value of his home by withdrawing some of the equity from the property to pay for home improvements.

He is one of a growing number of homeowners using equity release to pass on cash to their children, or grandchildren, while they are still alive.

"My son Darren had a few credit cards that he wanted to straighten out," he says, "and with my daughter Sara, she recently took delivery of a more up-to-date car."

The Rees family Jon and Margaret Rees decided to release £29,000 of equity from their home to help their children

Jon says he was persuaded to go ahead and release around £29,000 ($47,000) of equity from his home, in part because he wanted to see his children enjoy the money now rather than after his death.

"That was there all the time, with my wife and I discussing it stage by stage," he says.

Equity release works like a loan against the value of a property, which is made either in monthly payments or in a lump sum and which accrues interest.

When the homeowner or homeowners die or sell their house, the debt is paid off through the proceeds of the sale.

But the sum owed can never be larger than the value of the property and, with most schemes, the borrower cannot be made to leave their home, even when there is no longer any equity in the property.

Left in the lurch?

Figures from the equity release specialist Key Retirement Solutions show there has been a drop in the average age of home owners releasing equity from 71 five years ago to 67 now.

Start Quote

Mark Dampier

Nowadays being in your early sixties means you're still quite young so if you've taken out a scheme like this, aren't you really removing a real fail-safe that you might need in 20 years' time and not at 60?”

End Quote Mark Dampier Hargreaves Lansdown

Mark Dampier, head of research for the financial services group Hargreaves Lansdown, is worried by this trend:

"Bear in mind you're compounding an interest rate up all the time, so the loan is doubling roughly ever 10 years," he says.

"Nowadays being in your early sixties means you're still quite young so if you've taken out a scheme like this, aren't you really removing a real fail-safe that you might need in 20 years' time, and not at 60?"

In Jon Rees' case, the £29,000 of equity he has released will cost around £130,000 to repay by his 89th birthday.

The house is currently valued at just £15,000 more than that.

So if Mr and Mrs Rees live for another couple of decades, there may be little or no equity left in the property for their children to inherit.

Jon's daughter, Sara, was initially sceptical because of the bad press she had read about the practice.

"I wasn't in it for the money, my concern was more about if my dad was to go first, what would happen to my mum?" she says.

"But when I found out they [the equity release company] can't just sell the house from under them, I'm happy with it now."

Aerial view of homes in London The age at which home owners are using equity to release is dropping

The equity release specialists Key Retirement Solutions says its customers are increasingly using these products to help out children and grandchildren with buying their own homes, to service debts and even to pay for weddings.

"There is a considerable amount of housing wealth, in particular in the 65 years and older age group," says the company's group director Dean Mirfin.

"Many homeowners are seeing this as a real way that they can make a difference to tomorrow's generation, but importantly not as an inheritance in the future, but at a time when they will benefit more from it today."

The company says its customers give an average of £20,000 but that it is not uncommon to see gifts of £50,000.

Baby boomers give back

But Mark Dampier from Hargreaves Lansdown does not think using equity release to pass on money to children is a sensible idea.

"That's not what I think equity release should be about. Why do they do it? I don't think they've done the maths," he says.

Find out more

A broken piggy bank

Alvin Hall's Poorer Than Their Parents continues on BBC Radio 4 on Wednesday 10 August at 15:00 BST.

"If you're in your late 70s, into your 80s I think it starts to make sense.

"But you should discuss it with your family, because they might suggest giving you [the parents] some money to help you along the way rather than you getting stuck."

But with the baby boomer generation born in the 20 years after World War II owning around half of all the UK's housing assets, some analysts think more and more families will look for ways of passing on wealth while they are still alive.

"For most of the 20th century, it was a story of the self-made man or woman who earned enough during their lifetime to finance a good and healthy retirement," says Professor Dominic Swords from the Henley Business School.

"But now we're almost going back to the 19th century where a lot of wealth was accumulated by families and passed onto their children."

"Over the next decade, we might see some of the wealth accumulated by the baby boomers during the 30-year housing boom not simply sticking with them but being passed on to their children."

Professor Swords say this might help put right the financial shortfall many young people face today - particularly when it comes to buying a home.

And it is the current financial climate which urged Jon and Margaret Rees to help their children through equity release.

"We inherited nothing from our parents," says Mr Rees.

"People these days do buy their house for the benefit of when they're gone; to leave something for their children to make sure they give them a kick-start in whatever they're doing."

His daughter Sara nods in agreement.

"That's why I'm doing it for my daughter and my step-children."

Alvin Hall's Poorer Than Their Parents continues on BBC Radio 4 on Wednesday 10 August at 15:00 BST. Listen again via the BBC iPlayer or by downloading the Money Box podcast.

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