Questions about lifetime drawdown mortgage/equity release

milliemonster

Last year my mum died and my dad has been left alone in their house which he owns outright (worth approx £180,000 in current market), his only income now is his state pension which is giving him enough to live on but not enough to save or enjoy his life (holidays etc), he has a few thousands in savings (about £12k)

He has recently been invited to spend some time with a friend in Australia and he is going to go, I am really pleased about this as when my mum was alive she would never spend anything, so he is planning to go for a month or two next year. He has also been invited to stay with another friend in South Africa and this has got him thinking he needs to raise some money so has been looking at Equity Release.

He has contacted a company called Age Partnership, who have searched the market and come up with a plan with Prudential, it essentially will give him £20k (with a facility to drawdown up to £43k in the future), no payments in return, to be repaid upon death, the interest rate is fixed at 6.55%, he maintains full ownership of the property, they guarantee there will never be any negative equity.

I have concerns about this, I have looked at the documents they have sent and there are lots of unanswered questions, it gives no example of how much will be owed if he lives 5 years, 10 years, 15 years etc (he is 69 yrs old), no information about what exactly happens upon death (ie, do they seize the house and all its contents?, do they sell the house at a lot less than market value just to regain their share, do they put a time limit on how quickly it must be sold and the monies repaid?, what are the fees for doing all this? etc etc. My biggest fear is that having recently gone through the trauma of losing my mum, if I lost my dad and immediately their house that they worked all their lives for was just completely taken by some faceless financial institution for the sake of £20k would destroy me emotionally.

He doesn't want to use the few thousand he has currently saved as he sees that as his rainy day money.

I have spoken to him at length and he is not stupid and does have the same questions as me, I have suggested alternatives such as selling and buying somewhere cheaper (he can buy a nice 2 bed in our area for around £100k), or renting, or even me and my husband taking out a £20k mortgage on his house for him and us paying it

Can anyone offer some advice on these plans? I have told him to speak to my brother and sister for their advice aswell but would welcome any advice on here

dunstonh

My biggest fear is that having recently gone through the trauma of losing my mum, if I lost my dad and immediately their house that they worked all their lives for was just completely taken by some faceless financial institution for the sake of £20k would destroy me emotionally.

You may want to re-word that because it effectively indicates that your concern is your inheritance. I am sure that isnt what you mean.

If you dad borrows £20k on the house then that debt is put as charge over his property. As he is making no repayments, the compound effect is that the debt is always increasing and as time goes on its gets larger and larger and could potentially eat up all the equity in the house. However, that would take a long time and would require house prices to continue to drop and/or remain stable in price for a long time.

I have suggested alternatives such as selling and buying somewhere cheaper

In the current market downsizing is where most people lose the most money. Plus, he may like where he lives.

Can anyone offer some advice on these plans?

Any IFA with the required authorisation (many dont bother as transacting in this area usually means higher costs and the low level of business doesnt make it worthwhile).

milliemonster

Thanks Dunston, I really don't care about any inheritance as I just want my dad to be happy and I would gladly prefer him to get all the equity out of the house he can to spend on having a good life for himself for the years he has left than leaving anything to me and my siblings. I had realised that the £20k he would draw down would result in a charge on his property (but what would this mean for him in practice when he isn't committed to making any payments?) and also would increase significantly over time with compound interest.

I would hate my dad to move from the house I grew up in and that my mum loved, but have only offered this to him as an alternative (which he now thinks is going to be a better option)

I am just really asking for more advice on these kinds of plans as the information doesn't seem to be forthcoming from Age Partnership or Prudential, he won't see an IFA which I also suggested as he says he has ended up with bad advice on investments in the past

margaretclare

You say 'The interest rate is fixed at 6.55%...'

We have a lifetime mortgage which we did in 2003. We did this because we had a mortgage which could have gone on until we were 83 and we saw no point in that - although we're not 'poor' we could see better and pleasanter uses for £260 or so a month. The following year the roof had to be completely re-done, and we've done other home improvements since.

We looked at all the other options. Going on paying that mortgage - paid it all off just in time to die? Downsizing? Not much you can downsize to from a 1930s 2-bed bungalow. Moving - well, we could have moved to an ex-mining village in the Midlands, but that didn't appeal either.

Our lifetime mortgage is with Legal & General but Northern Rock actually lent the money. There were various safeguards - no negative equity ever, the interest rate was capped at 7.55% but because of reductions in the Bank Rate, it has now fallen to 3.80% in February, was 4.30% in January.

The 'charge on his property' is the same as any other mortgage! Until you've paid it all off it belongs to the mortgage lender, or a proportion of it does.

No one is going to touch the contents.

I think your Dad needs to 'shop around' a bit among other providers and get more factual information, because some of the misconceptions you appear to have mean that either he, or you, haven't understood the idea.

dunstonh

he won't see an IFA which I also suggested as he says he has ended up with bad advice on investments in the past

An IFA is the only one that can give independent advice on this. It is unlikely he had bad advice. He probably just lost some money in a negative period and pulled out at the wrong time rather than leaving it in (IFAs only account for 4% of complaints at the FOS despite doing the majority of transactions. So statistically, it is unlikely). It seems daft to get advice from a sales rep and not an independent adviser.

Nomad25

I have been puzzling over this, as Dunston knows, it may help you and your Dad to have a look at this link:

http://www.ship-ltd.org/

I fear the financial adviser may be the only way to go, there are ones that specialise in equity release. HTH.

margaretclare

Nomad25 is right. I should have said that the SHIP (safe home equity plans) website should be your first stop. It contains a mine of information.

An IFA can 'trawl the market' and get the best deal. That's how we ended up with L&G/NR and we've been happy with it.

But read the SHIP website first!

HTH

Nomad25

Also [took me a while to find my paperwork!]:

www.unbiased.co.uk

will help you find a suitable IFA and you can print off a free initial consultation voucher

dunstonh

If you speak to the general public over half those saying they have seen IFAs have actually seen insurance agents and not IFAs. Its possible your dad doesnt know the difference between an FA sales rep, multi-tied rep, whole of market adviser and an IFA and going back further an insurance agent.

milliemonster

Dunston, yes I am sure that's probably who my Dad has seen in the past

Margaret Clare - yes the interest rate is fixed at 6.55% permanently on this particular plan.

Thank you so much for all your help with this, I will have a look at the Ship website and try to get more information

EdInvestor

milliemonster wrote: »

He has contacted a company called Age Partnership, who have searched the market and come up with a plan with Prudential, it essentially will give him £20k (with a facility to drawdown up to £43k in the future), no payments in return, to be repaid upon death, the interest rate is fixed at 6.55%, he maintains full ownership of the property, they guarantee there will never be any negative equity.

I have concerns about this, I have looked at the documents they have sent and there are lots of unanswered questions, it gives no example of how much will be owed if he lives 5 years, 10 years, 15 years etc (he is 69 yrs old)

After 5 years he would owe 27,466, after 10 years 37,719 and after 15 years 37,800, assuming he borrowed 20k.

Bear in mind the value of the home is likely to rise and cover much of this.

Also bear in mind that if he ever needs long term care, the value of his home will have to be used to pay for it.Equity release is a useful way of extracting the money and using it for his own enjoyment before that happens -which it probably won't of course, but you never know.

Suggest he shops around for a better value scheme, 6.55% fixed is a high rate at present.