Equity release?

Trustysi

Hi

I am a not a newcomer to the site - I have been taking its good advice for years, and actually used some of Martin's templates to re-claim over £4000 in Bank charges from RBS before all the legal action put the process on ice. Absolutely superb.

I am new to the forum however, so hello everyone, I hope you might have a couple of ideas relating to my question.

My parents have recently put a largish extension on their house, which they remortgaged the majority of the funds for. They are getting on a bit now - (both at retirement age), so they had to take that arrangement as an interest only mortgage, so they now have an outstanding balance of about £85k - which isn't getting any smaller - and a property currently worth (although it's debatable at the moment obviously!) around £400k.

With the major downturn in the construction industry, and my dad's small architectural outfit downscaling the amount of work he is now doing (or indeed able to do) - kinda in semi-retirement, my parents are really feeling the pinch, and are also concerned at the prospect of potentially having to sell their home if the mortgage becomes too large a chunk of their income to be comfortable.

I really want to find a solution for them before they get really uncomfortable, worry themselves to death, and have to end up moving all the same anyway - which at their age will be a very upsetting upheaval.

I am aware of equity release - is there any companies out there where this isn't just a vehicle to shaft older people out of a fair share of their home's value? I cant think what else they might do. Selling would also mean that my dad would have to give up the exterior office which was also built in the extension, in order to save him the rent on his previous business premises, so that would really make life difficult for any work he may still do over the next few years. As his contacts are all in the local area, he is kinda tied to that location, and is well set-up to work from home - when there is work coming in!

I really appreciate any advice you might be able to give.
Simon

koexelek

Trustysi wrote: »

I am aware of equity release - is there any companies out there where this isn't just a vehicle to shaft older people out of a fair share of their home's value?

With a Lifetime Equity Release Roll Up Mortgage, the borrower gets potentially better value than a Home Reversion scheme.
With A Home Reversion scheme, part of the property is actually sold. If the borrowers don't live that long, it can work out to be an expensive option.

With a Lifetime roll up mortgage though, full ownership of the property is retained. Basically, this is a form of interest only mortgage, where instead of monthly payments being made, it is added on each month.

Crude example, but if someone borrowed £100000, and the monthly interest was £500, each month the debt would increase by £500 ( but interest is also componded on top of interest, so the second month you pay the interest on £100500 etc etc etc)
You do get better value from these.
If you die early, you do not pay much interest, so the estate is not eroded that much. If you live a long time, you pay more interest, because you have had use of the money you released for longer.

Keeping it on an interest only basis and paying the interest monthly is still the best option if affordable though, as that way, the debt never increases.

Hope that all makes sense.

Trustysi

very helpful, thanks. That certainly seems a bit more sensible than some of the pre-conceived ideas I had!

A couple of things though, would it have to be a specialised Equity release firm who would need to provide this service or is there a chance the Halifax (who are thier current mortgage provider) would enter into it?

Will they retain ownership indefinitely until point of death? That is to say, although statistically one should live another 20 years at least, if by chance one or both live until the interest has erroded the entire value of the house, will they be forced to leave or start paying the interest?

Also, do you think the deals on offer at the moment will be skewed into far less attractive territory due to the shaky real estate market?

And finally(!)..., is this a 'reasonable' financial course of action, or would you say it is more for individuals or couples with little other choice?

Thanks again!!

koexelek

You would need a specialised lender to do a roll up mortgage. Halifax will only do it of they pay the monthly interest.
Look for a company SHIP ( Safe Home Income Plan) registered.

With these, there is a " no negative equity guarantee"... so however long the survivor lives, and however much house prices maight fall, there would NEVER be a debt on the estate. If the mortgage was more than the house value on sale, the lender bears the loss.
Worst thing that can happen from the borrowers angle is that their is nothing to leave to anyone.

The equity release deals on offer have not been affected much by the recent rate changes. An average rate is about 6% ish. They might offer better rates in the near future if rate continue to fall though.

If all other angles have been explored, and the borrowers definitely want to stay in the house, it is a resonable option.
I have on some occassions had elderly couples where their children agree to pay the interest for them, on a monthly basis, in order to protect their inheritance being eroded.
This is another, less explored option.

I'd say, of people I speak to equity release about, about half tend to go ahead.

EdInvestor

https://www.ship-ltd.org

Equity release comes in two options these days - lump sum and drawdown.The latter reduces the interest rollup as you only take income when you need it.

Gewtting rid of the mortgage payments would be a lump sum E/R, but they could have a drawdown option as well, for later.

Watch for redemption penalties if you think there's a chance father's earnings may come back later and he might want to reduce the loan.

Conrad

An alternative to equity release (ER) is do arrange an ordinary remortgage at lower rates than ER, and to borrow say 24 months payments on top to pay the debt for that period. The sorts of people that might want to do this are those that feel they might sell the home for a higher price in 2 years time as opposed to now, but of course its quite a gamble to take.

Last time I checked the rates on ER, they were around the 6.5% mark whereas an ordinary remo could be had on a tracker of about 3.99%, which may go down shortly (but may be subject to a collar).

So the amount paid out is less - but its a fine balance and needs a lot of detailed work to determine if its the way to go. A very savvy client of mine had his parnets do exactly this and it did work out a lot cheaper over the years, but tread with great caution.

Trustysi

Sounds a pretty canny idea, but as they have just had the place done to their ideal spec, I know they will want to stay and enjoy it for a few years at least. The unfortunate fact is that they now find themselves over extended (no pun intended!)
A potential get-out was going to be that my sister has recently been through a fairly horrible divorce, but on the upside has received a fairly sizeable settlement.
She had planned to put a large chunk of this towards paying the entirity of thier motgage off in return for a percentage ownership of the asset, but her financial advisor has recommended against this, as her UBS job is not as secure as one would ideally want, and it would be dangerous to tie up the resources for such a long period.

Simon

Trustysi

Do you know if there will be tangible penalties if they do chose to sell the property and pay back the loan in full at that point? I think there is a chance they may well wish to sell in 5+ years time

EdInvestor

Trustysi wrote: »

Do you know if there will be tangible penalties if they do chose to sell the property and pay back the loan in full at that point? I think there is a chance they may well wish to sell in 5+ years time

Shop around for a deal that suits you in re early redemption penalties etc.

koexelek

Trustysi wrote: »

Do you know if there will be tangible penalties if they do chose to sell the property and pay back the loan in full at that point? I think there is a chance they may well wish to sell in 5+ years time

Most have early repayment charges fot the first five years.

Coventry Building Society used to do one without, but I am not sure if they still do

getmore4less

Can't family members help them out some way

Why use an external company that will insist on a good deal for themselves.

Keep the money and house in the family.