By Tom Philips at March 10, 2023

How Equity Release Could Help Pay for Further Education

Many people aged 55 or over might be wondering how equity release could help pay for further education for their children or grandchildren.

At Equity Release Warehouse, we help people across the UK release equity from their homes, which they can spend however they want to.

However, with the housing market making it increasingly difficult to get on the housing ladder, many parents and grandparents are choosing to spend their equity release funds on helping their loved ones.

If you are wondering how equity release could help pay for further education for your loved ones, then speak to our friendly and helpful team at Equity Release Warehouse.

Equity release explained

If you live in the UK and are aged over 55 years old, then you might be interested in releasing equity from your home.

Equity release is a type of mortgage that allows individuals to take a chunk of equity out of their home, which you are then able to spend however you want to.

With equity release, you do not have to repay a penny whilst you are still alive. In fact, you only have to repay the loan after you pass away when your loved ones and next of kin will sell your house and use the money from the sale of the house to repay the loan.

You will be charged interest on your equity release loan, which will compound over time. When this happens, the overall loan amount increases and reduces the potential amount of inheritance you are able to leave your loved ones.

This is why a lot of people choose to repay the interest on their equity release loan whilst they are still alive. This reduces the overall loan amount significantly.

When you release money from your home, any money you receive will be tax-free. You are able to receive this tax-free money in one large lump sum, known as a lump sum mortgage.

Alternatively, you are able to receive this money in a number of smaller sums, known as a drawdown plan [1].

If you want to release equity from your home, it is important to make sure that you seek professional help from equity release advisers or financial advisors who have a good understanding of how equity release works.

With equity release, you are able to spend the money you receive on a number of different things including home improvements, family holidays, day to day living or helping a family or friend with University fees or house deposits.

Alternatively, if you struggle with any debt then opting for equity release eases the pressure on you and can even stop any creditors from taking any legal action on you [1].

If you are wondering how equity release could help pay for further education, then speak to a member of our team at Equity Release Warehouse.

The bank of mum and dad (BOMAD)

There is no denying the fact that the bank of mum and dad is busier than ever, and for good reason too. The cost of living, University fees and house prices increased significantly after the Covid-19 pandemic.

This means that people in their 20s and 30s will be struggling to save up for a house or nice things, such as holidays or a car.

In fact, recent studies have found that over half of all house purchases made by people aged under 35 were funded by the bank of mum and dad or grandparents. With house prices increasing year on year, this statistic is only set to rise over the coming years [2].

Whilst most people joke about the bank of mum and dad, these statistics show that it is not something that should be ignored, as more young people than ever are heavily relying on their parents to fund their future.

Unfortunately, millennials who have only just entered their working lives will now find themselves about to enter a recession, which means that they might have to turn to mum and dad for more support in the future.

Whether parents are contributing to just some or all of their children’s house deposits, it is highlighting a trend that millennials are struggling to save their money.

This makes sense, as it’s more expensive than ever to rent a property, eat out or do a weekly food shop. However, millennials need to find ways to pay their mortgages once they get into their house, which is set to rise with rising interest rates.

Unfortunately, two-thirds of all buyers aged under 35 years old admitted that they would not have been able to pay for their house at all without help from their parents, admitting that it would have taken them an average of 5 years to save enough money to do so [2].

In fact, more parents and grandchildren are choosing to pay for their children’s further education and University fees, in order to avoid their children having to take out student loans with rising interest rates.

As you can see, the bank of mum and dad is extremely busy. Whilst it’s nice that parents are able to help their loved ones in this way, it is important that the parents only gift the money to their children if they are in a financial situation to be able to do so.

Whilst it is great if the parents can use their savings to do so, not all parents are in a position to do this.

If you do not have enough savings but still want to help and support your children financially with house deposits or further education fees, then you might want to consider equity release.

If you are wondering how equity release could help pay for further education, then speak to a member of our team at Equity Release Warehouse.

How Equity Release Could Help Pay for Further Education – The cost of further education

University and further education has never been more expensive. The current cost of anyone who entered University after 2017 is £9,250 a year, which does not include accommodation fees [3].

Most students attend University for 3 years, which means that your University fees will cost at least £27,750 minimum.

However, University fees are set to rise over the coming years. In fact, anyone who started University after the 2017 – 2018 academic year might see their fees increase even further [3].

By the time current University students enter the workforce, their debt would have increased significantly due to inflation and interest [4].

Whilst students do not have to repay their student loan until they earn a certain amount, once you do start to repay your student loan you will start to repay a significant amount each month.

However, in the UK you only have to repay your student loan when you earn at least £2,274 a month before tax, which equates to £27,295 a year before any tax or any other deductions [5].

If you are wondering how equity release could help pay for further education, then get in touch with the team at Equity Release Warehouse where our friendly team can point you in the right direction.

How Equity Release Could Help Pay for Further Education

Releasing equity from your home is a great way of helping your children or grandchildren with their University fees. Equity release is a great option as the money you receive will be tax-free, so will go a long way.

The other great reason why equity release is a great way of funding university fees and further education is that you can receive your money in either one large lump sum or a number of smaller payments, known as a drawdown mortgage.

This means that you can choose to either pay off your loved ones’ University fees in one large lump sum altogether or each term with a drawdown plan.

The process of equity release could take up to 12 weeks to complete, so it is important to start this process early before your child or grandchild starts their first term at University if this is what you are planning on doing.

The beauty of equity release is that you do not have to make any repayments to the loan whilst you are still alive.

So, instead of your child or grandchildren having to repay their student loan whilst they are still alive, your equity release loan will only have to be repaid once you pass away or move into a care home, upon which your house will be sold. The money from the sale of the house will pay off the loan.

Whilst this might result in less inheritance for your next of kin, at least your children or grandchildren won’t have any University fees to pay off once they start to earn some real money.

There are lots of ways which equity release could help pay for further education. If you would like more information on how equity release could help pay for further education for your loved ones, then speak to the team at Equity Release Warehouse.

What types of equity release plans are there?

If you are wondering how equity release could help pay for further education, then you might be interested to learn that there are two main types of equity release plans used by lenders across the UK.

These are known as lifetime mortgages and home reversion plans, which are explained further below in more detail.

1. Lifetime Mortgages

Lifetime mortgages are by far the most popular type of equity release. This is because they allow you to release money from your home completely tax-free, whilst allowing you to remain the sole owner of your property. You only have to repay the loan when you pass away or move into a care home.

When this happens, your next of kin will be responsible for selling your home and using this money to pay off the equity release loan. Anything that is left over will go to them as an inheritance.

Remember that you will be charged interest on your equity release loan, which will turn into compound interest if left untouched.

You will be given the chance to repay some of the interest on your loan whilst you are still alive, which allows you to reduce the overall loan amount and therefore increases how much money you are able to leave your loved ones.

In order to qualify for a lifetime mortgage, you have to be aged at least 55 years old and own your own property in the UK worth at least £70,000.

You will also need to have paid off a lot of your pre-existing mortgage, and use the equity release money to pay off any of the remaining mortgage.

2. Home Reversion Plans

Home reversion plans are less popular than lifetime mortgages, as they work slightly differently. With a home reversion plan you have to sell a percentage of your home in return for the equity in your property.

This subsequently means that when your next of kin comes to sell your house, a proportion of the sale will have to go to the bank, instead of them. This means that their inheritance will be reduced.

With a home reversion plan, you have to be aged 65 or over and own your own home in the UK worth at least £70,000.

Both lifetime mortgages and home reversion schemes are protected by a no negative equity guarantee, thanks to the Equity Release Council.

This means that when you come to sell your property, even if your property sells for less than the loan amount, your loved ones will not be liable to pay the difference.

If you are considering a lifetime mortgage or a home reversion plan and are wondering how equity release could help pay for further education for your loved ones, then speak to the team at Equity Release Warehouse.

What are the advantages and disadvantages of equity release?

It is important to consider both the positives and negatives when it comes to equity release when considering how equity release could help pay for further education for your loved ones.

1. Advantages

One of the biggest benefits to equity release is that it allows you to gain access to the equity that is already built up in your home, without having to sell your property.

Moving home in later life can be incredibly challenging for some, and with equity release, you get to stay in the house that you have known and loved for all these years.

If you bought your house years ago, then your property has most probably increased in value by a significant amount. This means that you might be able to gain access to a significant amount of money, much more than you would through using a credit card or taking out a bank loan.

When you opt for equity release, you are also able to spend the money however you want to. You might choose to treat yourself to a once in a lifetime holiday, to an extension or to help family members with University fees or house deposits.

The equity release industry is also monitored and standardised by the Equity Release Council, which means that your loans will be protected by things like the no negative equity guarantee.

This guarantee ensures that even if your property decreases in value, your loved ones will not have to pay the difference if the sale of the property does not cover the cost of the loan.

2. Disadvantages

Whilst there are lots of reasons why equity release is good, there are also a few disadvantages to equity release.

One of the biggest disadvantages to equity release is that you might end up leaving less inheritance to your loved ones this way. Instead of leaving the money from the sale of your house to your loved ones, they will have to use that money to pay off the loan you have taken out.

When you choose to take out a home reversion plan, you will also have to sell a percentage of your home to the lender. This means that the banks will own a percentage of your home, and when you go to sell a percentage of the sale money will go to the lender, instead of your next of kin.

You will also be charged interest on your lifetime mortgage, which will easily and quickly turn into compound interest if you choose not to pay it off as you go.

Do I need financial advice before using my equity release funds to pay for my child’s further education?

If you are contemplating how equity release could help pay for further education, then it is important that you speak to a financial adviser first before making any final decisions.

It is very important that you are in a stable financial position before helping your child, and doing so should never put you in financial risk or debt.

Before you choose to pay off your child’s University fees, you should always seek independent financial advice from a financial advisor.

They will be able to work out if you can afford to help your child with the cost of their further education, and will also work out how much equity you are able to release from your home, depending on your age and the value of your home.

You should only ever consider helping your child or grandchild with the cost of their further education if you can truly afford it, and your financial advisor should use their own equity release calculator to make sure that you can afford to do so.

You should also seek legal advice, to make sure that you draw up a contract to ensure that everything is above board.

How Equity Release Could Help Pay for Further Education – How does gifting my money to my family affect my tax?

When you gift your money to your loved ones to pay for their further education fees, you might be wondering whether or not they have to pay any tax on this money before paying off their student loans.

However, this is not the case. Your children or grandchildren will not have to pay any tax on the money that they receive, and neither will you.

Nevertheless, you might find that further down the line you have to pay tax. You are exempt from the first £3,000 you gift away every year, which is exempt from inheritance tax.

However, you are able to carry out any unused allowance from previous years, which could come in handy. It is also important to note that this allowance is per person.

It is also important to understand that if the parent or grandparent giving the money away dies within 7 years of giving the money away, this money will be classified as a part of their inheritance.

This means that if the total inheritance comes to more than £325,000 then you will be taxed at least 40% on the excess [2].

If the person gifting the money was to die within seven years it would still be classed as part of their estate for inheritance tax purposes. This means if their total estate, including the gift, is worth more than £325,000 then up to 40% tax would be due on the excess [2].

If you are wondering how equity release could help pay for further education for your loved ones but are worried about how gifting your money might affect your tax, then speak to the team at Equity Release Warehouse.

How equity release could help pay for further education – How much does equity release cost?

If you are wondering how equity release could help pay for further education, you might be wondering how much an equity release plan would cost.

There are a few different set up costs when it comes to equity release, which include the cost of an equity release advisor, the cost of an equity release solicitor and a home valuation.

This can cost anywhere between £1,000 and £4,000 but very much depends on which solicitor you choose and the complexity and size of your equity release loan.

You will also have to pay interest on your equity release loan, which will be charged on the total loan amount. This interest will quickly compound and increase your overall loan amount, which means you will be charged even more interest, and so on.

However, you must remember that you are under no obligation to repay this interest whilst you are still alive. You only have to pay it off upon the sale of your house if you choose to do so.

If you would like more information on how equity release could help pay for further education but are worried about the costs of equity release, then talk to the team at Equity Release Warehouse for help and support.

The advantages and disadvantages of the Bank of Mum and Dad

When it comes to the bank of mum and dad, there are a number of advantages.

For one, your children will feel more supported, protected and hopefully supportive than ever. However, there are also a number of disadvantages to using the bank of mum and dad, which are important to understand and consider.

The pros of using bank of Mum and Dad

One of the biggest pros to using the bank of mum and dad is that you are gifting your children and grandchildren a tax free amount of money that will go a long way for them.

In addition to this, by releasing equity from your home and gifting it to your children you will reduce the size of your estate significantly which will therefore reduce your inheritance tax.

By gifting your equity release funds to your loved ones, they won’t have to worry about paying interest on their University fees or worrying about having to save up for a house deposit during these difficult times.

The cons of using bank of Mum and Dad

Whilst gifting your money to your loved ones is a lovely thing to do, there are also a few disadvantages to giving your money away.

As a result, you will end up leaving less money in your inheritance to your next of kin. This can be a particularly difficult topic to navigate, and if you have multiple children then it is important that you do the same for all of your children, so that they do not argue over inheritance after you pass away.

In addition to this, if you are planning on giving your equity release money to your children or children to pay for their further education, then you will have to pass some additional checks when applying for an equity release loan.

Finally, gifting money to your children can cause family friction, particularly if you pay for one child’s further education and not the others, even if the second child does not go to University, they might expect more of a helping hand further down the line.

You should remember that any money that you gift to other people whilst you are still alive will reduce the inheritance you plan on leaving to your next of kin.

Talk to Equity Release Warehouse

If you are wondering how equity release could help pay for further education, then speak to our friendly and professional team at Equity Release Warehouse for advice and support.

We will be able to provide you with the necessary advice you need before deciding whether gifting your money away is right for you. We will also be able to establish how much equity you are able to release from your home depending on your age, your current health and the value of your home.