Sam Dunn: 'Should I get an equity-release loan to help my daughter?'

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The Independent Online

Question: Our daughter and her husband have saved for four years to buy a house, but are desperately short of cash for a decent deposit. As I'm retired and own my house, I've been thinking about an equity-release loan to help them. I visited a financial adviser on top of my own internet research, but it seems risky. What do you think? Mrs DH, Watford



Answer: It has come to a pretty pass when a parent's natural desire to help their offspring has led to the grim prospect of you remortgaging your home in retirement to unlock valuable cash to buy a first-time property in a falling market.

Our well-documented obsession with owning a home is nothing new, but the extremes to which we'll go to "get on the ladder" can still prompt a sharp intake of breath. Your good intentions are laudable, but couple the possible consequences of risky equity-release schemes to today's glum outlook for property, and your help for your daughter could prove a financial millstone around your neck.

Equity-release schemes, which let owners either sell a chunk of their home to an investment company for a discount or take out an expensive "lifetime" mortgage to be repaid at death or house sale, should only be considered as a very last resort, warns 'Which?'. Last September, it published a report underlining how equity-release schemes, now sold by big lenders such as Abbey, Prudential and Norwich Union, "can be very expensive, inflexible and leave people with little or no equity in their home, severely limiting their choices later in life".

If you want to move later in life, say, an equity-release scheme can make it downright impossible to do so. And cash released from these schemes can also have an impact on means-tested benefits such as pension credit or council-tax benefits, says the Financial Services Authority, which regulates the industry. That's not all: saddling yourself with such debts, which must be repaid at a later stage, usually by surviving family at your death or if you move into a care home, can wipe out any inheritance for heirs, too.

Your best bet lies elsewhere: consider "downsizing" your own home, says Melanie Bien at the broker Savills Private Finance. "If you could cope in a smaller property, a better idea might be to sell up and trade down; this would enable you to buy a property outright while generating cash to put towards your daughter's purchase." Say you sell your home for £250,000; a sale and subsequent purchase for £185,000 releases £65,000 for your daughter. Of course, it's not the most friendly of housing markets for sellers right now since many buyers are struggling to get finance, but a realistic low price could secure a swift sale.

The alternative is to persuade your daughter to carry on saving while house prices continue to slide; savings accounts aren't paying out much at the moment, but it's more than the rate at which house prices are falling, and when they do come to buy, they should be in a strong position to bargain hard and negotiate a hefty chunk off the asking price.

If you're still unconvinced, visit charity Age Concern's website at www.ageconcern.org.uk.

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