Would you want your children as landlords?

One alternative to equity release is to gift your home to your children. But beware, says David Prosser – there are several pitfalls.

Equity-release products have a mixed reputation. These schemes allow older homeowners to tap the equity in their houses to meet living costs, and can be associated with high interest rates or exit fees. It's no wonder that people try to find a way around the problem, often by asking family members for help. In one alternative option, parents gift a property to their children, who take out a mortgage on it, and give this money back to their parents. However, there are several pitfalls associated with this route, says Naomi Rovnick in the Financial Times.

Firstly, the loan would not be considered a standard buy-to-let mortgage. Because your children would be renting the property to a close relative, it would instead be treated as a residential mortgage, and so they would be subject to strict affordability requirements. Assuming that you won't be paying market rent, it might be difficult for your children to demonstrate that they can afford the mortgage payments. Lenders may also require a higher deposit than normal. These mortgages are often "very hard for lenders to approve", says Aaron Strutt of broker Trinity Financial.

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.