Equity Release Situation

jl1_2 · 19 March 2005 at 10:19AM

I'm helping my mum look into equity release for her house.

She'd like to get around a £30,000 lump sum on her home which is worth around £120,000. She currently has a £12,500 interest only mortgage, which she'll probably pay off with the new mortgage, leaving around £17000 to spend. Her income is state pension plus £250 payment from previous marriage, and she has no other assets or savings.

The main priority is getting the money to make it available to use for nice things ASAP, however I'd also like to find out what's most sensible in terms of me and my brother's inheritance.

The main option she's considering at the moment which she's had a quote on is an interest only mortgage, which will cost around £150 per month in the interest payment, and of course the full cost of the mortgage will be deducted from the sale of the house.

What I'm trying to get her to also consider, and what I want to know if it _is_ a better option is an interest bearing mortgage. The cost on this (from a quick fiddle with Egg's online mortgage calculator) seems to be around £250 per month, but with this option my brother and I could pay the extra £100 per month (or more) to make the payment the same for mum, but obviously this has the advantage that at the time of selling the house the repayment on the mortgage will be much lower.

My brother is a student, and I have bad credit which rules out either of us getting the finance, although I could afford to pay around £100 per month long term.

Any advice on this situation appreciated - are these the best two options considering that inheritance is an issue, and that I have some monthly income I could put in this that I'd like to use now to increase the return on the house at the time of sale?

lisyloo · 19 March 2005 at 1:01PM

"and of course the full cost of the mortgage will be deducted from the sale of the house"

Is this a normal mortgage?
How long is the term?
Can I ask how old she is?

What I'm getting at is - Is there any chance she might not be dead after the term of the mortgage (people do sometimes live to 100).

"is an interest bearing mortgage"

Can you tell me what this is and how it differs from an interest only mortgage.
Are you just talking about repayments?

"I have some monthly income I could put in this that I'd like to use now to increase the return on the house at the time of sale?"

Have you considered worse case scenarios (I'm good at those :-)

You seem to be relying on the inheritance for your return.
1) What happens if your mum get alzheimers and leave her money to the cats home (she can leave it to whoever she wants).
2) What happens if after 20 years you fall out and she decides to leave you no money.
3) What happens if you need the money (for a divorce perhaps) and the only way you can get your return is to sell your mums home.
4) What happens if you can't pay e.g. you are ill. Where does that leave your mum? Have you arranged sufficient insurance for all the things that might happen to you - death, redundancy, sickness, accident etc.
5) What happens if you mum goes into a home and the house is used to pay for her care (which it will be) You will get no return.

I fully appreciate what you are trying to do, however there are a lot of downsides to these family arrangements that you need to think about up front.

Have you looked at proper equity release schemes rather than normal mortgages. These have certain advantages and may cover some of the problems (although at a cost).

jl1_2 · 19 March 2005 at 1:37PM

lisyloo wrote:

"and of course the full cost of the mortgage will be deducted from the sale of the house"

Is this a normal mortgage?
How long is the term?
Can I ask how old she is?

What I'm getting at is - Is there any chance she might not be dead after the term of the mortgage (people do sometimes live to 100).

"is an interest bearing mortgage"

Can you tell me what this is and how it differs from an interest only mortgage.
Are you just talking about repayments?

The first interest only mortgage quote was as far as I know a normal mortgage, not a specific equity release scheme; it was interest only (is there a term for an interest only mortgage? I assumed they just continued indefinitely).

She's 63, if it helps to work things out, I would guess 10-15 years.

From my cursory look at mortgage calculators there were interest-only and 'normal' mortgages on which payments pay off interest _and_ part of the borrowed amount. Interest bearing was the wrong term, I meant where payments are not just interest.

"I have some monthly income I could put in this that I'd like to use now to increase the return on the house at the time of sale?"

Have you considered worse case scenarios (I'm good at those :-)

You seem to be relying on the inheritance for your return.
1) What happens if your mum get alzheimers and leave her money to the cats home (she can leave it to whoever she wants).
2) What happens if after 20 years you fall out and she decides to leave you no money.
3) What happens if you need the money (for a divorce perhaps) and the only way you can get your return is to sell your mums home.
4) What happens if you can't pay e.g. you are ill. Where does that leave your mum? Have you arranged sufficient insurance for all the things that might happen to you - death, redundancy, sickness, accident etc.
5) What happens if you mum goes into a home and the house is used to pay for her care (which it will be) You will get no return.

1 - Unlikely enough to discount, although I appreciate that planning for worst case scenarios is a good idea, you have to draw the line somewhere. I'd be aware of and prepared to take this risk.
2 - Possible, would be a shame, but I'm prepated to put this in the unlikely enough to discount column. I'd be aware of and prepared to take this risk.
3 - Hadn't considered that - are you saying there may be scenarious where I would be forced to sell mum's house while she was alive to get a return? I'm more interested in preventing the loss of £30000 than earning and 'counting on' a definite return of £30000.
4 - [edit] No, I need to look into this. Are there insurances available to cover specific things like this, or would I be better off earmarking part of a 'larger' insurance policy?
5 - Well it would be the same people paying for her care is it would be benefitting from a small sum taken out from the sale of the house, are there any scenarios (i.e. government allowances) where it's beneficial for there to be _less_ money available to pay for care?

Have you looked at proper equity release schemes rather than normal mortgages. These have certain advantages and may cover some of the problems (although at a cost).

Can you suggest any 'proper equity release schemes' that don't have the side effect I'm trying to avoid - i.e. on releasing equity of £30k, having to pay back £30k (or more) at the sale of the house?

Ted_Hutchinson · 19 March 2005 at 1:50PM

Help the aged factsheet Equity Release Schemes

Age Concern Raising income or capital from your home - FS12

lisyloo · 19 March 2005 at 2:28PM

"(is there a term for an interest only mortgage? I assumed they just continued indefinitely).
She's 63, if it helps to work things out, I would guess 10-15 years."

Yes, Interest only mortgages have terms after hich it needs to be paid off.
So are you assuming she will die before 78.
That seems quite dangerous to me.
Average life expectancy for a female is higher than that and there is a chance she could live 20 years longer than that.
Of course you might be able to re-schedule or re-mortgage but I wouldn't want to guarantee it and I think it gets harder with age.

BTW - will she continue to get the £250 if her ex-husband dies?

"3 - Hadn't considered that - are you saying there may be scenarious where I would be forced to sell mum's house while she was alive to get a return? "

I'm saying you might find yourself in circumstances where you either want or desperately need access to your money. You need to consider this.
It's a very long tie in (with no definite end date).
You could (for example) be in a bitter divorce with a nasty ex-spouse where your options are either to be destitute or to consider selling the home. I don't think anyone could actually force you to sell it, but I can certainly imagine scenarios where you might really want/need the money and not be able to get at it.

"4 - [edit] No, I need to look into this. Are there insurances available to cover specific things like this, or would I be better off earmarking part of a 'larger' insurance policy?"

Yes you can get insurance for all of these things. Obviously there is a cost attached. I am not sure what you mean by "larger" insurance policy.
I don't think you can get it "all in one". You would probably need several (although you might not need all of them - if for example your employer provides cover).

Also consider that if you are divorced then the courts will consider your primary responsibility to be towards your children and not your mother (I'm talking future if you don't have any kids right now). This could put you in a situation in a divorce where you couldn't afford the £100 mortgage payments.

"Well it would be the same people paying for her care is it would be benefitting from a small sum taken out from the sale of the house, are there any scenarios (i.e. government allowances) where it's beneficial for there to be _less_ money available to pay for care?"

Two points
1) Why are you assuming small sum. This could cost the ENTIRE house and you get nothing (ok, might not be the most likely scenario but 24 hour nursing isn't cheap).
2) By giving your mother money without any contractual ownership of the house, there is the possibility that it might be lost. It might be beneficial if you considered actually buying part of the house (and you owning part of it) because that then wouldn't be used for care.
There are of course other consideration like capital gains tax that you'd have to work through. It's not simple.
depends how big you think the risk is, but nursing homes are about £25K per year so £100K would go in a few years.

"Can you suggest any 'proper equity release schemes' that don't have the side effect I'm trying to avoid - i.e. on releasing equity of £30k, having to pay back £30k (or more) at the sale of the house?"

You've lost me here.
Can you explain again what you are trying to avoid.
With any scheme (including a mortgage) you will have to pay for "borrowing" the money.
The advantage I'm putting forward for equity release schemes is that it finishes when you die or go into a nursing home, not after a fixed term like a mortgage. There is however a higher cost attached.

jl1_2 · 19 March 2005 at 2:49PM

What I'm trying to avoid is my mother or me losing or spending money unnecessarily for the easy-out of an equity release. We have the goal of raising a lump sum of capital, and in short I'm trying to work out which of the available options is going to provide the best return for me as 1) an inheritor when mum dies, 2) someone with £100 per month to put into the kitty.

Equity release schemes are all very convenient, but all seem to have high costs when it comes to selling the house, so it seemed much wiser to take out for example a 20 year normal mortgage to raise the lump sum - this can then actually be paid off in part by mum - the recipient of the lump sum, and in part by me, with the clear advantage of a much smaller or perhaps zero sum to pay on her death, assuming she's still living in this house.

It seems logical that there aren't any equity release schemes that would achieve the same thing, is that correct?

lisyloo · 20 March 2005 at 12:28AM

"We have the goal of raising a lump sum of capital"

Can you briefly explain why there is a goal of a lump sum.
The reason I'm asking is that I'm wondering whether it would be better for you simply to give her £100 per month. This would mean you wouldn't be tied in should you face any difficult circumstances e.g. sickness.
She could save up her money if she wants to pay for a large item e.g. holiday, so it shouldn't be a problem except in the very short term.

"It seems logical that there aren't any equity release schemes that would achieve the same thing, is that correct?"

I am not aware of any equity release schemes that allow repayment.
This is because most people don't want to or can't make repayments.

If you are happy with all the risks I've put forward (which might not be exhaustive) then I can't see any reasons not to do it.
You jsut have to be aware that it's a long and indefinite tie in and could cause problems with your own plans in the future e.g. buying your own home or strating/increasing your own family.
I would be worried about feeling resentful if I couldn't do something I desperately wanted to because of this commitment, but I guess that's down to personal choice.

You could go for part ownership. You might have to incurr some tax on selling but that might be preferrable to lossing the whole lot if it's spent on long term care (she has to pay for her care but you don't so your part of the house wouldn't get used for care costs).

jl1_2 · 20 March 2005 at 9:20AM

lisyloo wrote:

"We have the goal of raising a lump sum of capital"

Can you briefly explain why there is a goal of a lump sum.

It's to be used for larger things like house improvements, a new car, possibly a holiday. I'd considered just giving her a monthly sum, but she's bad at money management and I don't want to have to control her finances, or feel bad if a monthly payment gets frittered away.

You mentioning that made me think about it again, and I suppose another option is for me to put the 100/month into a savings account, but really the point is to have a large sum available now to make significant home/lifestyle improvements.

"It seems logical that there aren't any equity release schemes that would achieve the same thing, is that correct?"

I am not aware of any equity release schemes that allow repayment.
This is because most people don't want to or can't make repayments.

If you are happy with all the risks I've put forward (which might not be exhaustive) then I can't see any reasons not to do it.
You jsut have to be aware that it's a long and indefinite tie in and could cause problems with your own plans in the future e.g. buying your own home or strating/increasing your own family.
I would be worried about feeling resentful if I couldn't do something I desperately wanted to because of this commitment, but I guess that's down to personal choice.

I understand what you've mentioned in terms of putting this money in and being in a situation where I might want to desperately see a return but not be able to - in response to that I think I have two scenarios - while she's still alive and living in the house I'm not interested and will never count on being able to cash out any of the equity of her house for myself. When she's dead or no longer living in the house, I will then be interested in but again not counting on cashing out the equity from her house. 100/month is not insignificant, but not large enough for me that if some horrible scenario came up where I was definitely not going to see any of the money from the sale of the house, but I still had to keep up my payment in case she lost the house or something, that would not be entirely unbearable.

The worst option it seems would be if mum moves in to care. If I'm not a part owner, then you're saying she will have to pay for her care out of the house, in which case I won't see any return. It's probably a complex subject, but what happens in the case where people don't have the money to pay for their care, or it runs out - does it become state provided, or is it expected to be taken up by family? If it's expected to be taken up by family, then my 100/month will have saved me a lot of money for her care anyway.

You could go for part ownership. You might have to incurr some tax on selling but that might be preferrable to lossing the whole lot if it's spent on long term care (she has to pay for her care but you don't so your part of the house wouldn't get used for care costs).

Yes, that's another option I need to look in to.

lisyloo · 20 March 2005 at 10:02AM

"but what happens in the case where people don't have the money to pay for their care, or it runs out - does it become state provided, or is it expected to be taken up by family?"

In the case where people don't have any money then it becomes paid for by the local authority. So if you owned say 10% of the house and she owned 90%, then only her 90% could be used for care. Your 10% would be protected.
You have to be a little careful here as well. It would be illegal for your mother to give you her house to avoid care payments (same for claiming other benefits) but nothing wrong with you buying a proprtion at market rate (as she still retains the cash so it's just an equity for cash swap). Some people try giving properties to children to avoid care fees. Obviously that's not what you are doing, but I would warn you to keep records so that if the local authority start asking questions you can prove what you paid.

Houses can be owned in any proprtion you choose.
The problem that you have is that you are paying monthly so your ownership is growing from 0% each month upwards.
It isn't practical to update the legal documentation monthly. So it's difficult to come up with a %. If you leave it for a while and your mum needs care then you won't be protected. If you do it upfront e.g. you own 10% upfront and she dies then your sibling(s) might get a little upset also the local authority will be unhappy for the reasons stated earlier.
So it is a little tricky.

You also mentioned a brother.
Is your brother fully aware that you would want this return at the end i.e. his inheritance is reduced.
You would be well advised to discuss this with your brother so that no upset is caused through mis-understandings.

Equity Release Situation

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