Equity release vs mortage when retired

razorsharp

My mother and father in law have recently retired (both aged 64), they have no mortgage on their home but want to move to a different area which has a slightly higher cost for a desirable home of the same size.


Their current home is worth about £180,000 so they would look for an equity release to cover the additional £30,000. He has a work pension of about £25,000 per annum, which they both live from very comfortably. Soon they will both receive a full state pension which I understand to be circa £8,000pa. Neither of them have any lavish or expensive hobbies, or desire to spend money on bigger holidays then they are accustomed.



As my wife is their sole daughter and benefactor I wish we were in a position to loan them £30,000. However we have just completed a self build, have a baby on the way, and would need to take a loan.


I have questioned my father in law about an Equity Release and why he is choosing this option over a £30,000 mortgage. Even at 10% over 20 years, this would be £3,528pa less than half the state pension yet to come. If they took a mortgage and they really needed disposable income they could revert to an equity release.


My father in laws logic is, I don’t want a mortgage now I am retired, I want my money to work for me... He feels he is making the right decision because he has consulted an IFA.


I think he sees the mortgage option as a loan, and oddly watching his equity drain in a release wouldn’t worry him as much.


I really believe he is making the wrong choice, particularly given the fact he can afford a mortgage. Should pursue trying to get him to understand why a mortgage would be better, or do you disagree?

CloudCuckooLand

Maybe I'm missing something...

How can he use equity release, as he will presumably need to sell in order to fund a £210k purchase? i.e. more expensive area = need £30k extra?

Where does the other £180k come from is he doesn't sell..?

Or are there two (already owned by them) properties involved?

razorsharp

CloudCuckooLand wrote: »

Maybe I'm missing something...
he will presumably need to sell in order to fund a £210k purchase?

Hi CloudCuckoo, The move will include selling their current home.

beecher2

So they have a deposit of £180,000 but where is the other £30,000 coming from when there's no longer a mortgage free house? There is no equity in this scenario.

CloudCuckooLand

They say you learn something everyday! So, Equity Release companies allow you to "borrow" the extra you need upfront to complete on a purchase..? So, not releasing from the current house as such, but selling, then buying-and-releasing from the new house in the one transaction? Mmmm, didn't know they did that. Might be useful in some circumstances, I suppose.

My thoughts would be;

- limited number of Equity Release companies. The interest rates are unlikely to be as competitive as a mortgage.
- cumulative interest on ER tends to eat into the rest of the house.
- need to check into SHIP, that a reputable company/product are used. http://www.ship-ltd.org/

I'd see what rates of interest are quoted for ER. Say, if 8% and you can show him a mortgage would be 5% or so, that should help a rethink.

razorsharp

CloudCuckooLand wrote: »

They say you learn something everyday! So, Equity Release companies allow you to "borrow" the extra you need upfront to complete on a purchase..? So, not releasing from the current house as such, but selling, then buying-and-releasing from the new house in the one transaction? Mmmm, didn't know they did that. Might be useful in some circumstances, I suppose.

Yes in a nut shell. I suspect technically they release to the lenders solicitors client account, which also takes reciept of payment for the sold property. The solicitor will then complete the purchase with both sums, adding the required charge of the lender to the Deeds.

I am not sure what the rate is I do suspect it will be higher for the reasons you cite. The most signifcant concern I am trying to bring to the forefront of his mind is the erosion of their current equity.

Another concern, the more niche lenders become, the smaller the client base, and perhaps responsability.

ViolaLass

razorsharp wrote: »

The most signifcant concern I am trying to bring to the forefront of his mind is the erosion of their current equity.

I think there are other reasons to be concerned but if that is your main concern, you may struggle to stop it sounding like "stop spending our inheritance!". Why should the parents care about the equity being eroded? (partial devil's advocate question)

Thrugelmir

razorsharp wrote: »

Yes in a nut shell. I suspect technically they release to the lenders solicitors client account, which also takes reciept of payment for the sold property. The solicitor will then complete the purchase with both sums, adding the required charge of the lender to the Deeds.

The only way the purchase can be completed is with a mortgage.

No one will advance money upfront on something that isn't owned.....

laurel7172

Have you considered your mother-in-law's position should f-i-l predecease her?

As the pension is his, a widow's pension could be half (or even less) what he's getting now.

Also, your f-i-l must be aware of the inflation with regard to heating bills etc.

Would you really be happy to see your bereaved mother-in-law paying a mortgage instead of putting on the heating, in order to finance your inheritance?

razorsharp

[FONT=&quot]Hi ViolaLass, in part yes I don't want to see potential inheritance spent on a finance company, enable people not in the family who are smarter with money to have a better life. Given the equity in the property has been earned by my parents in law, I want it to be available to them if they later need it.

Laurel7172 raises a great point, to consider my m-i-l if my f-i-l dies first... She would loose some of the state pension, but not his private pension.

So take the scenario he lives for another 15 years and they pay the mortgage and property prices rise by 15%. On a 20 year repayment mortgage they have now paid back the majority and property is now worth about £240k a sum the m-i-l could use for private care. Now switch the scenario, if they have equity release, its going to be nearer £150k.

The first scenario is a clear winner... now I would not advocate them considering the mortgage route it left them with less disposable income than they are used to or desire, my parents in law are not greedy and reasonably money conscious.[/FONT]

Thrugelmir raises the same doubt CloudCuckoo did previously, the fact is they have an IFA who has a product that will advance 30k towards the purchase of a property where they put forward 180k. Maybe the paperwork shows it as a loan until the property is purchased and they have a charge entered on the deeds.

So lots of thought from everyone, thanks, so far the responses are all validating my concern. I will ask about the provider, I am rather curious.

ViolaLass

razorsharp wrote: »

[FONT=&quot]Hi ViolaLass, in part yes I don't want to see potential inheritance spent on a finance company, enable people not in the family who are smarter with money to have a better life. Given the equity in the property has been earned by my parents in law, I want it to be available to them if they later need it.[/FONT]

But not if they want to use it now?

And wouldn't a mortgage also allow someone to make some money and perhaps have 'a better life'? What's wrong with wanting a better life anyway?