release equity from house

fionab_4

Hi All, I'm a new member to this web site so hope this receives some replies with advice.

My parents are pensioners and live in Glasgow (Scottish Law), they are struggling financially and wonder what their options are for releasing equity from their fully paid property.

I understand there are lots of scams going and I wouldn't want my parents to fall into one of them.

Kind regards

Fionab

ReportInvestor

Hi Fiona and welcome to the site ,

One option is to downsize, but sometimes that can't be done, or people are attached to their area or house.

To avoid some of the scams make sure the company you go through is SHIP (Safe Home Income Plans) provider. This will mean that your parents won't get evicted just because interest rates change. The anecdotal evidence, backed up recently by figures, is that "salesmen" have switched to reversion schemes once the FSA started to regulate home income plans.

Equity release can be right for some people, but it can also prove a relatively expensive way to raise mortgage finance, in spite of improving rates recently.

The SHIP website

The SHIP Safety Check
Anyone using their home to raise money should ask themselves three fundamental questions:

Do I have the right to live in my property for life?

Do I have freedom to move to suitable alternative property without financial penalties?

Will I receive either a cash sum or regular income payments?

If you buy a home income plan through a member of SHIP, you are guaranteed that the answer to each of these questions is YES. And this guarantee applies whether you are raising a loan with your house as security or selling all or part of your property to generate cash or income.

________________________________________________________________
There are two main types of equity release plan:

Reversion schemes allow homeowners to sell all or part of their home, typically at a 50 per cent discount, to a commercial firm. In return they get a lump sum and the right to remain in the house for the rest of their lives.

Lifetime mortgages are loans secured on your property. The owners get a lump sum, annual income or drawdown facility and the interest rolls up. The balance is repaid when the home is sold.

Lifetime mortgages are FSA regulated (because they involve a loan), reverson plans are not (because they involve a [part] sale).

Ian_W

You might also want to read these from Age Concern & Help the Aged:

https://www.ageconcern.org/AgeConcern/Documents/FS12_0605.pdf

https://www.helptheaged.org.uk/Money/Investments/equityrelease/default.htm

Don't know whether there are any differences in Scotland. One of the above or the local CAB should be able to tell you though.

Gorgeous_George

My parents also own their own home.

My brother has offered to buy it from them and then rent it back to them (I'd be happy to do same and am less volatile than my brother). This would release all the capital tied up in the house. They're not short of money at the moment so have declined the offer.

If you were in a position to do the same it may be worth considering but isn't risk-free (families fall out etc.). If they'r enot too emotionally tied to the house, selling up and renting might be a good way ahead.

GG

margaretclare

Gorgeous_George wrote:

My parents also own their own home.

My brother has offered to buy it from them and then rent it back to them (I'd be happy to do same and am less volatile than my brother). This would release all the capital tied up in the house. They're not short of money at the moment so have declined the offer.

If you were in a position to do the same it may be worth considering but isn't risk-free (families fall out etc.). If they're not too emotionally tied to the house, selling up and renting might be a good way ahead.

This idea comes up quite frequently. You have to consider: the rent has got to be an economic rent depending on what other similar rented properties are fetching in the area concerned. In addition, the rent is income, and has to be declared on a tax return. There has to be a proper tenancy agreement as well, to protect all parties. You, or your brother, as landlord then become responsible for all repairs, upkeep etc.

So, while the parents have released all the equity tied up in the property, they're stuck with having to pay rent for the rest of their lives. If they've spent many years paying off a mortgage, why should they go back to paying rent?

I'm not surprised your parents have declined the offer.

Margaret Clare

EdInvestor

The terms of equity release plans are improving quite quickly as more providers get into the market.

Look for the lowest possible interest rate, and also go for a drawdown facility where the amount is established at the start, but the parents only take money as and when they need it.This means interest will roll more slowly, meaning less of the equity in the property goes to the provider.

Also look for low redemption penalties - as better deals emerge, it's likely that remortgaging will become common in the equity release market in future. If house prices rise, parents may also want to go back for more money later.

Gorgeous_George

margaretclare wrote:

If they've spent many years paying off a mortgage, why should they go back to paying rent?

I'm not surprised your parents have declined the offer.

Margaret Clare

For them
They'd sell for say £100K and the rent would be £80 pw. Interest at 4.5% would earn them about the same as the rent.
Free repairs and that's a lot of weeks that they can pay the rent

For brother (or me)
Primarily, the knowledge that parents are able to spend the money that they have earned. Although in reasonable health, both are approaching 70 years old. The money would give them the ability to REALLY enjoy their retirement.
Mortgaging the house would offset tax liabilities. Any residual tax liability would be small compared to the warm feeling that parents are enjoying their retirement.
No worries about them having to sell up to pay for care (in later years if required).
No worries about Inheritance Tax when that time comes.

Of course, there would also be risks but as the family is relatively comfortable financially, I think they would be worth taking.

The idea is better, IMO, than equity release schemes.

GG

EdInvestor

They'd sell for say £100K and the rent would be £80 pw. Interest at 4.5% would earn them about the same as the rent..... parents are able to spend the money that they have earned.

Perhaps I'm missing something, but if the money has to be invested to earn interest to pay the rent, how can they spend it?

ReportInvestor

Advisers would be guilty of mis-selling if the advocated equity release as a means of investing to release income.

Sometimes that can happen if the main aim is to avoid IHT. But the interests of all parties (parents, children & IFA) in such circumstances are best served if a lawyer can also advise the parents of the possible consequences of their decision.

margaretclare

ReportInvestor wrote:

Advisers would be guilty of mis-selling if the advocated equity release as a means of investing to release income.

Sometimes that can happen if the main aim is to avoid IHT. But the interests of all parties (parents, children & IFA) in such circumstances are best served if a lawyer can also advise the parents of the possible consequences of their decision.

Equity release -> investing -> release income.

Can't see it - too complicated.

We did equity release - 'lifetime mortgage' - 3 years ago for the sole purpose of paying off the existing mortgage which would have continued until we're 83. We could also see a better use for the £260 a month which was going on the mortgage.

Part of the deal was that we HAD to 'be advised of the possible consequences of our action'. This was required: our conveyancer had a checklist with tick-boxes - had we discussed with our sons and daughters, were they all aware of the effects on their inheritance, several other points we had to be clearly-aware of before proceeding.

We had in fact informed DH's son and daughter, and my surviving daughter, and all of them expressed no interest, all said 'it's yours, do what you want'. So we did. None of them expects an inheritance - all 3 are doing nicely on their own, thank you very much.

Margaret Clare

Gorgeous_George

EdInvestor wrote:

Perhaps I'm missing something, but if the money has to be invested to earn interest to pay the rent, how can they spend it?

Well, £100K in the bank earning 3.9% would cover rent of £325 per month (which is the rent I charge for a larger property nearby).

If they didn't touch the £100K they would benefit from tenant status (with a great landlord).

If the spent £100pw from the capital, the money would last approximately 14 years. This would see them into their 80's.

If they spent £75pw, the £100k would last almost 18 years and they'd be touching 90.

I know this assumes the rent remains static and I'd be marginally out of pocket (other than house price rises) but it would allow them to release the equity in their house without involving the vultures.

As it is, it won't happen.They don't need to release the equity so it's all hypothetical.



GG