Using Equity Release To Pay For University Or School Fees
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Equity Release Deals For Education Purposes
Drawdown Equity Release Plans
Provide you with an overall flexible cash facility. An initial lump sum is taken and the remaining money is then drawn down as & when you require it.
The benefit is that interest is only charged on cash withdrawn.
Lump Sum Equity Release Plans
Lump sum equity release schemes provide a one stop cash withdrawal. They are best for people who know they will require one withdrawal.
After a length of time certain plans can be reviewed for a top up depending on criteria.
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Lets Get Started: Why Use Equity Release To Pay For Your Childs Education?
The cost of education is astronomical, and that’s despite a freeze in fees in 2018 under Theresa May’s government. The cost of one-year university fees is an eye-watering £9,250 for the academic year 2018 – 2019. Data from the Institute of Fiscal Studies show students in England can expect to graduate with student debts over £50,000.
As the report pointed out, the current university fee structure has two beneficiaries. The government and universities. For students, they can expect to graduate with lifetime debts accruing interest at around 6% on average.
The vast majority of working parents who previously planned financially for education fees were struck by the high cost of entry, previously £3,000 in 2006 trebling to £9,000 from 2012. For students graduating with a high student debt, many are silently relying on the bank of Gran and Grandad to help them get ahead financially. For students in England, the repayments they need to make begin when they start earning above the income threshold of £2,143, after which, 9% of their income is the minimum repayable monthly. As anyone familiar with loans will know, making the minimum monthly repayments is a guaranteed way to stay in debt for longer due to interest continually accruing.
Grandparents are more regularly tapping into their accrued wealth to help their Grandkids out by getting them out of student debt earlier, avoiding the monthly interest accruing, which in turn helps their Grandkids put more income aside that’s then able to be used as a down payment to get on the property ladder. Without the assistance of family, many are being trapped in a cycle of student debt that holds them back financially.
Accessing Equity Release To Help Your Grandkids Financially
It should be noted that not everyone is suited to equity release. Those who are suited are considered as cash-poor and asset rich. This is the term used to describe those who don’t have rich investment portfolios but are sitting on property worth a substantial amount. In the UK, it’s estimated that 75% of property wealth is held by those over the age of 50. By the age of 55, those with cash tied up in their properties can use an equity release plan to release some of the cash tied up in the property, either through a lifetime mortgage or a home reversion plan.
The most common method of equity release used by Grandparents is a lifetime mortgage. A 2017 report by Saga revealed that a whopping £37 Billion is paid by Grandparents to their Grandkids with 23% of those stating that the money they gift to their Grandkids is to put towards education costs. The vast majority using equity release to gift to their Grandkids, other than for student debt, is to help them onto the property ladder with the average amount released being £33,000.
University fees aren’t cheap, and neither are deposits for first-time home buyers. The property wealth of grandparents is becoming an increasingly attractive option for them to gift their family, letting them benefit from their property wealth in the present rather than leaving it tied up in property until it’s passed on as an inheritance. Many will cite it as being more beneficial to see their Grandkids enjoy the freedoms of less debt and a good start in life, rather than see them struggle to obtain a mortgage and repay their debts.
Eligibility Criteria For Equity Release To Pay School Fees
Grandparents can’t just decide that they want to release some money from their property to gift to their Grandkids just because that’s what you want to do. Equity release is highly regulated and can only be accessed after receiving independent financial advice by an FCA authorised financial advisor.
The reason for this is due to the possible high interest costs. Interest on lifetime mortgages attract interest at favourable rates, but they use compound interest, which means they charge interest on the interest charged. Not just the capital released.
Research into the cost of equity release plans estimate that the average plan doubles every 14 years, meaning for those releasing equity at the earliest eligible age of 55, could see their loan repayment double by the age of 69.
To protect against properties going into negative equity, meaning the debt owed would be more than your home’s value when it is eventually sold to repay the loan, equity release plan providers are required to provide a no-negative equity guarantee. However, this only applies to those who are registered and active members of the Equity Release Council.
There are substantial safeguards in place by the Equity Release Council requiring all their members to abide by. While the Council doesn’t regulate the equity release market, they do play an important role in overseeing regulation. The regulatory body responsible for upholding industry compliance is the Financial Conduct Authority (FCA).
Financial advisors providing advice on equity release products need to be registered and authorised by the Financial Conduct Authority. Plan providers aren’t required to be members of the Equity Release Council; however, the vast majority of independent financial advisors specialising in Equity Release will only refer their clients to members of the Council so you can benefit from the safeguards in place.
To be eligible for the vast majority of equity release plans, the criteria you need to meet are:
- To own your home outright, or use some of the equity released to repay your outstanding mortgage first
- To be over the age of 55
- The majority of providers will require your home to be worth at least £70,000
The Types of Equity Release Explained
- Lifetime mortgages
- Lifetime mortgage with drawdown
- Interest-only lifetime mortgages
- Flexible lifetime mortgages
- Home reversion plans
About Lifetime Mortgages
Lifetime mortgages are as they sound. A mortgage on your property that remains in place until a specific life event occurs, which will either be when you die or move into long-term care, after which, your property is sold, and the capital plus interest is repaid to your plan provider.
Interest on lifetime mortgages is applied continuously, which raises the cost of finance. Plan providers will base the amount you can release on a loan-to-value (LTV) ratio usually starting at between 14% and 19% of your property value at the age of 55, then increasing incrementally with age. Those using equity release over 70 will be able to borrow more, often around 50% LTV.
It should be remembered that interest is accrued on all money released from the date it’s released. If you don’t plan on using all the capital released right away, it’s worth considering drawdown as you only pay interest on what’s released, and you can leave some on reserve until you need it.
Drawdown lifetime mortgages
With drawdown, homeowners over 55 can release an initial lump sum payment of £10,000 (with most providers) leaving the rest available to draw on as and when you need it. The upside to this is your loan only accrues interest on the money released. Initially, you’ll be able to draw £10,000, and the interest will only be payable on that. Whatever else is available as reserve stays available until you need to access it and the interest is only charged from the date you receive the funds. These plans can help lower the cost of borrowing.
Interest-only lifetime mortgages
This type of equity release plan allows you to take a lump sum or use drawdown and keep up the interest repayments as you would on a standard interest-only mortgage. The upside to this is that you’ll know how much equity of your property will be left to your beneficiaries as inheritance. The downside is that the interest is payable for the rest of your life, or until you can no longer afford it.
Flexible lifetime mortgages
A flexible lifetime mortgage lets you make partial or full monthly repayments of interest without committing. You can repay some or all of the monthly interest while you can afford it and if you run into financial strain, the loan will revert to interest roll-up, requiring no monthly repayments.
Home reversion plans
Home reversion plans are far less common as they involve homeowners over the age of 55 to sell all or some of their home equity for less than market value. Home reversion plan providers generally pay 20% to 60% of your properties market value, which is why these types of plans only represent around 1% of the UK equity release market.
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Tips For Grandparents Planning To Use Equity Release For University Fees
Speak with your family
The discussion about equity release with family isn’t about how it affects their inheritance. If you’re planning to remain in your home for the rest of your life, you may require support in later life to help manage your home. As an example, if you’re living in a detached property with a half-acre or larger garden with tall hedges surrounding your property acting as a privacy screen, chances are, at some point, you’ll need a helping hand to manage the garden. Inside, adaptations may be required such as installing a stairlift and downstairs loo etc.
Once you take out a lifetime mortgage (if you don’t use drawdown), it may be the only time you’re able to release the equity from your home. Your kids may suggest some things that you haven’t considered that you may require in your senior years. Many working adults aren’t worried about their parents’ estates because it’s their inheritance. They’re more concerned about balancing their family life with a full-time job then juggling caring for their parents in senior years, which is why it’s worth a family sit down to discuss things first.
Release only the amount you need
Another aspect of discussing things with your family is you can find out exactly how much would be beneficial, avoiding releasing too much. Without knowing the full amount of debt your Grandkid has, you won’t know whether the money’s helping or giving them too much that they’ll wind up blowing it. When you have the facts, you can use equity release for the debts they’ve accrued, leaving some of your property wealth on reserve for later in life, while also benefiting from only attracting interest on the amount released and not the amount left on reserve.
Consider all possible alternatives
Your financial advisor will go over alternatives to equity release with you to ensure it is the most appropriate solution for your circumstances. One of the important aspects to consider with equity release is its effect on pension credits (even if you aren’t retired yet) as those are a means-tested benefit. If your savings are over the threshold, it can lower the amount you’re entitled to or even cancel out pension credits. Without those, you lose entitlement to a range of health benefits, including vouchers for prescription glasses, heating discounts, financial assistance for gas boiler repairs and much more.
Benefits of Gifting a Living Inheritance for Student Debt
For anyone with wealth to leave as an inheritance to their loved ones, the biggest worry is that they’ll blow the lot on extravagant purchases or squander it on day-to-day living expenses by living beyond their means because they can afford to.
By using equity release, you’re able to give your family an advance on the inheritance you planned to leave them anyway and have some say or control over how they spend the money. If it’s solely for paying university fees, you can insist that they pay what you give them towards their student debt and not book a holiday or treat their friends.
By using equity release to lend your Grandkids a helping financial hand, you’ll be able to see the fruits of your property wealth benefiting your family, knowing it’s not going to waste. Depending on the type of equity release you take out, you could release some to help your grandkids with student debt, take some for yourself, while leaving a nest egg available for larger family events such as newborns to the family, weddings, christenings or to take your loved ones on a holiday with you.
There are no restrictions on how you spend any money you release from your home equity. You’re free to spend it as you like, but you do need to know that it is the right type of finance solution to suit your circumstances. Impartial financial advice is the only requirement you need to meet to ensure equity release is right for you, your future and your family.
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