Using equity release to cover endowment shortfall

Alex47

Hi my dad is 62 and mom is 64 they took out an endowment mortgage 21 years ago and they said it would pay off the motgage and provide a pension nest egg as well. This hasn't happened and we are in the process of the second stage complaint to the Financial ombudsman about miselling as the company have written back to me saying that we are out of time.

We are facing a shorfall of about £18000.00 and my Dad wants to go down the equity release route to pay off the shortfall and do some improvements in the house.

Is this the right way to go and have you any advice as to what we should do?

Thrugelmir

To release equity your parents will need to borrow money. The same money that needs to be repaid. So solves nothing.

Irrespective of the merits of a mis-selling claim. Your parents should have been actively addressing the shortfall on the endowment some time ago and also planning for retirement. As the facts were known some years ago.

holly_hobby

Without getting into the morality of not addressing the situation earlier, as is easy to do, instead lets try and give some positive assistance instead.

I am going to firstly assume that the complaint to FOS will be rejected as timebound - as unless there were exceptional circumstances that led to the significant delay in a complaint being submitted, from the receipt of red (shortfall) letters from the provider - you will certainly be well out of time on making a complaint on this.

So lets move to what possible remedies may be considered.

You mention an equity release mortgage - I am going to take a leap and assume (on your parents ages) that you mean a Lifetime Mortgage, to in effect raise sufficient equity to repay the CURRENT estimated shortfall of 18k, plus an amount to support the cost of some home improvements.

Your parents ages do qualify them for both a lifetime mortgage and a Home Reversion Scheme.

In the both cases your parents will release a sum from their property, which will be based on the value of the property and their ages.

In both cases, no mortgage repayments are required for the duration of the loan, until entering into long term care or death occcurs. (on 2nd life of course for a joint application).

Both schemes will incur legal and mortgage product fees.

And thats where the similarities end, moving to how the property ownership is treated there are significant differences ...

Lifetime mortgage - as stated above, no monthly mge reapayments, instead the instread element is rolled up on to the debt held with the lender. The indvidual retains complete ownership of the property, with the accumulated debt repayable by the individual upon their entry into long term care or their estate post death. It is therefore important to consider that the roll up element may completely erode any equity left in the propety - and that it is therefore essential to secure a scheme provider registered with SHIP, and whom provides a "no negative equity" gurantee on redemption.

Home Reversion Scheme - this is where your parents will effectively sell a % of the property to the provider, in exhange for a lump sum payment. Again no monthly repayments or indeed interest element applies - and they will retain the right to lifetime occupancy of the property. Upon death or entry into long term care the provider will require sale of the property and the agreed % of sale returned to them.

Any lifetime mortgage advice and guidance should be sought from a suitably qualified Equity Release Adviser (ER1).

The issue would be if your parents would want their estate (left to those bequethed) reduced in such a manner, or indeed if the amount of equity released would be sufficient to not only repay the shortfall (which is currently estimated at 18k, but could be more or less, and also service the cost of home imps as reqd).

If your parents dont wish to consider the above, or sufficient equity can not be released for their requirements - if would be very difficult for them to obtain a further residential mortgage primarily due to their ages. Their lender may give them some flexability with regards to repayment of any shortfall on endowment maturity - it would be a good idea to try and sound this out now, so that you can prepare.

If there is a shortfall at endowment maturity, with little or no flexability from the mortgage lender for a payment arrangement schedule, and/or family can't assist with repayment of the shortfall - there really be only one solution, and that would be to sell the property and move into rented accomodation.

Hope this helps

Holly