The cost of university fees in the UK is more expensive than ever, with students paying an eye-watering £9,250 a year in tuition fees.
Over the course of a degree, tuition fees alone rack up to nearly £30,000, and that’s before paying for living costs, study materials, and other essential bills, which can make university life extremely expensive. If you want to pay for higher education, either for yourself or your child or grandchild, but don’t have savings available, then equity release could be an option.
If you’re aged 55 or over and own your home, then equity release can provide you with either a lump sum, regular income or combination of both, in return for you unlocking some of your property wealth. You can remain in your property and the money you borrow is paid back, along with any interest owed, when you die, or move into long-term care.
However, as we explain in this article, there are significant downsides to consider if you’re thinking about using equity release to fund tuition fees, especially given current interest rates and student loan terms. A professional financial advisor can help you decide on the best option for you depending on your personal circumstances.
Here, we explain how equity release can be used to access money to put towards higher education, what the risks are and where to seek advice.
Your equity release options
There are two types of equity release plan – the most popular are lifetime mortgages, with home revision schemes being another option.
A lifetime mortgage enables you to borrow money secured against your property while remaining in your home. The money can be taken as a lump sum or in smaller amounts over time.
Alternatively, a home reversion plan involves you selling part of your home to the equity release provider, while continuing to live there rent-free. You’ll usually only get 30-60% of the market vault of your home, so you will be losing a large proportion of its value that you could have left to beneficiaries or released if you were to downsize.
If you’ve a mortgage on your property, you can use equity release to pay this off, and do as you wish with the remaining money such as funding living costs, holidays, or putting it towards university costs. Any money released, and interest on this, rolls up over time and is only repaid on death, or when you move into long-term care.
Between July and September 2022, 6% of over-55s who used equity release to gift to family or friends did so to support people’s university ambitions, according to later life advisor Key. Will Hale, chief executive of Key, said: “While the average £13,862 released for this purpose would not cover the full cost, it would no doubt mean that people would need to borrow less from other sources and ultimately start their careers with less debt.”
Bear in mind that taking out an equity release plan is a major financial decision, and it’s vital to understand the details. When you take out an equity release plan, the rules state that you must seek independent financial advice to decide if it’s right for you.
You can read more about equity release in our article Equity release – what is it and how does it work?, or more about each kind of equity release product individually in Lifetime mortgages explained and Home reversion – what is it and how does it work?.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Should I use equity release to pay for university tuition fees?
Rates on equity release plans have soared in recent weeks following the government’s mini-budget. The lowest rate available on an equity release loan is currently 6.90%, compared to 4.44% at the end of September, according to financial data analyst Defaqto. This increase means that a homeowner taking out a £50,000 equity release loan would pay £21,606 more in extra interest over 10 years. By comparison, rates on student loans are lower, and they work differently to other types of debt. The government has capped the interest rate on student loans from 1 September 2022 at 6.3%. This will be reviewed in December.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, said: “if a client came to us saying they wanted to use equity release to pay for university fees, we’d say that student loan rates are cheaper right now, and that if the debt isn’t cleared within 30 years then it’s wiped anyway. However, we are finding that people are now wanting to give a living inheritance, and they want to help their children or grandchildren out while they are alive, rather than when they’re gone.
“People simply do not want to see their children or grandchildren sink into debt, so they’re using equity release as a way of making sure they don’t. Overall, we’d urge clients to consider alternative options right now, but people really do want to help out the younger generation as much as they can while they are alive, and student debt is one of the issues they face.”
Bear in mind that your child will stop repaying their student loan debt 30 years after they graduate. Someone earning £31,000 a year will repay £333 a year, which amounts to £9,990 a year over 30 years, which won’t repay typical tuition fees racked up at university, or the interest. Therefore, your child may never repay the full amount of student loan debt anyway. Making overpayments on student loan debt isn’t necessarily worthwhile either, unlike other debts, because most people don’t clear their loans before the government wipes the debt.
How much money can I release?
If you decide that equity release is the right option for you, the amount you can release depends on a range of factors, including the value of your property. You might, for example, own a property valued at £400,000 and want to release £30,000 to give your child towards the cost of higher education. Therefore, you’d take a lifetime mortgage for this amount and agree to rolling interest on this debt that will be repaid once you die or move into care.
You can see how much you might be able to release from your home by using this free online equity release calculator. If you want to look into equity release, you should always seek professional financial advice as the next step. Make sure you’re aware of all the fees and charges involved in taking out an equity release too (see below). For more information, read our guide Costs of equity release explained.
When you’re choosing an equity release provider, make sure it’s a member of the Equity Release Council, which is the trade body for the equity release sector. Products provided by its members must, for example, provide you with the right to remain in your property for life or until you need to move into long-term care. They also offer a ‘no negative equity guarantee’, so that you can never owe more than the value of your property even if property prices fall.
What other options are there to fund university fees?
If you need money to fund university fees, or for any other purpose, equity release isn’t your only option. There are several alternative solutions that could help, such as an unsecured loan, if you don’t need to borrow much and can fund some of the fees from your savings, for example.
Remortgaging is another option if you’re still paying off a mortgage. You may be able to extend the term or borrow more, or take out a retirement mortgage and only pay the interest on the amount you borrow. You can find out about the different mortgage options in our articles Mortgages for over 50s: What you need to know and Mortgages for over 60s: What you need to know.
Another option is downsizing to release equity in your home, by selling your property and moving to a smaller home. However, moving is expensive considering estate agent fees and stamp duty, and it’s important to consider if this is truly what you want to do.
Giving your child money towards university fees and inheritance tax
If you want to help fund a child or grandchild’s university costs, you can give any amount of money you receive from equity release, or from your savings to them, but there could be inheritance tax (IHT) implications. Any money you gift your loved ones isn’t subject to IHT provided that you live for at least seven years after giving away the money. If you give the money away and you die within seven years, the money could be liable to inheritance tax.
Your estate is subject to inheritance tax at 40% on the value of your estate above £325,000 when you die, or £650,000 if you’re married.
You can give away up to £3,000 each year free of IHT, and carry this allowance over to the following tax year if it remains unused – increasing your allowance to a maximum of £6,000 for a year. You can also make smaller gifts of up to £250 a year to as many people as you like. However, you cannot combine this with the £3,000 allowance in a single year. Read more about how inheritance tax works in our article Understanding Inheritance Tax and Which gifts are exempt from Inheritance Tax?