Equity Release

Woodski

My parents have both retired, though they still do a few hours a week.

They are considering realeasing some of the equity in their property to make things a little easier financially. The mortgage is paid for they are both 66 and the property is worth around £155k. They are considering taking about 40K out. What are the implications if they do this?

They are under the illusion that they will still be leaving around 100K for inheritance for myself and my brother.

Does anybody know about this, and how it works.

EdInvestor

They are considering taking about 40K out. What are the implications if they do this?They are under the illusion that they will still be leaving around 100K for inheritance for myself and my brother.

You are not wrong in thinking this could be an illusion.

https://www.ship-ltd.org.uk is a useful website.

To stop the loan rolling up and eating up all the equity in the home, look for the lowest interest rate you can find and draw the money down as and when it's needed, not as a lump sum at the start.

Consider leaving it until they are older, when they should get a better deal.Also look at redemption penalties so they can move to a better deal later.This is a new market and the deals are improving all the time as more competition comes in.

It's very likely a "remortgage" might be sensible in a few years' time, especially if the value of the home has increased, so make sure this won't cost an arm and a leg.

I would suggest thorough vetting of all financial advice received as this area is prone to misselling at present.* It needs carefeul handling though to make sure the oldies know you have their best interests in mind, and are not just trying to stop them improving their living standard at the cost of your inheritance.

In future IMHO equity release deals will be managed in much the same way mortgages are now by astute investors (aka rate tarts ) - not as a one-off deal. So aim to make the management of their asset a win-win all round over the long term.

*Though I note that most of the complaints to the FOS appear to be from children angry that their parents have done equity release schemes without telling them.These complaints are not being upheld, of course.

sebastianj

Very sound suggestion above. I think a Flexible mortgage will be the best or what they call 'one account' as the interest cancels out and they will be charged on what ever money they spend.

rgd
seb

bristol_pilot

In my view, they are not old enough for this and there is a risk that all the equity will disappear. Avoid.

lisyloo

I agree with bristol_pilot.
I looked into something similar for parents at 74 and I didn't think it was a good deal.

Instead they downsized to a small flat which is a lot cheaper to run.
Martin will tell you this is the best option.

Could they consider a smaller home or living in a cheaper area? (doesn't necessarily have to be far away).

I would think it very unlikely that £100K would be left (bear in mind that £100K will be a lot less in real terms in 25 years).
If they borrowed £40K in a lump sum (which isn't the best idea) then they would have to pay interest on this for potentially 25 years.

I just did a quick compound interest calculation on my calculator and I have come up with £171, 674 as the debt after 25 year (at 6%).

Make sure they do plenty more research and know what they are getting themselves into.

My view is basically that they are far too young to start living off their assets.
If they can't live within their means then they need to look for a cheaper lifestyle (smaller home?).
Sorry if that sounds harsh, but better that they know what they are getting into.

margaretclare

This is a serious matter and all alternative options should be looked at first.

We did this 3 years ago specifically to pay off an existing mortgage. We'd have been paying until we were 83. One of us had to be 68 before we could 'borrow' against 25% of the property value.

We did this because (1) downsizing is not an option - there's not much you can downsize to from a 2-bed bungalow and (2) we were not at all bothered about leaving anybody an 'inheritance' so long as we have a roof over our head as long as we need one.

However, if we'd lived in a bigger house i.e. 3-bed house on 2 floors, upstairs bathroom etc, we definitely would have 'downsized'. You could say that my first husband and I 'downsized' in 1990, from a 3-floor pair of weaver's cottages in the Pennines, to something that was just big enough, manageable, and convenient for us.

Margaret

Woodski

thank you all for your advice. im sure they will stay as they are