equity release - basic question!

malcb

While accepting that ER is not generally recommended (c/o ML) - I am looking into it for a friend who it would appear it is the least worst option. I understand that there are essentially 2 kinds

- lifetime mortgage - retaining ownership but paying interest (either rolled up or during the loan) to the provider
- selling all or part of the property to the provider

What I've not seen though is a list of the pro's and con's of the two kinds balancing one against the other - merely a general analysis of the pro's and con's of ER itself.

Can anyone help? There have to be more issues in deciding which option to take than just the figures.

jonesMUFCforever

Con - you sell say 30% of property to a lender for say £50k now.

In 20 years time assuming another credit bubble your house is now worth say £300k

So now 30% of your house is £100k that you owe and the interest on top!!!

Don't do it unless you are at death's door.

malc_b

However, say Mrs X has a house worth 750k and will die in 3yrs. At that time her estate, assuming IHT threshold stays unchanged, will owe 130k tax. Or she could take 300k now live like a queen for 3yrs, and pay 25k interest to ER. In situation 1 she leaves 630k but pays 130k tax and leaves on baked beans for 3yrs. In situation 2 she leaves 325k, pays no tax and has 100k to spend each yr.

OK silly examples but the point is that ER reduces the estate tax bill so you need to look at the overall picture as well.

magpiecottage

I wrote a booklet on this last year which a number of IFAs now use when they advise on Equity Release.

Essentially there are two options:

Home Reversion - you sell all (or part) of your home in exchange for cash and the right to live in it for life. Once you die (or permanently move out) the property is sold and the home reversion company keeps the proceeds.

The price you sell for will be less than the open market value and if you die soon after will be poor value.

On the other hand, since you no longer own the house, it does not form part of your estate.

Lifetime Mortgage - you take a mortgage on your home but still own it. When you die, the property is sold and the mortgage paid off. The family receive any surplus.

Normally interest is added to the loan, though and interest will be charged on earlier interest. This means the loan can increase dramatically if you live a long time.

If you die after a short time, the legal costs will make the overall cost disproportionately large, though.

The house forms part of your estate but the outstanding debt can be taken off it.

Most such schemes also offer a "no negative equity" guarantee so if the loan grows to more than the sale proceeds the lender will stand the loss - but check this with the adviser.

A good adviser will suggest you discuss the wishes with your family but you do not have to.

In the end, the adviser's responsibility is to you, though, not your estate.

susanmarie

Depending on the health of your friend, you may also be able to look at impaired health equity release (called Enhanced Equity Release) on some websites. http://www.ascotequityrelease.co.uk/enhanced-lifetime-equity-release-mortgages Enhanced Equity Release.

If you are suffering with any conditions which make it likely you will not live for as long in the property, then the equity release provider will take this in to account and allow you to release more cash from the property than a standard equity release plan.

iolanthe07

Equity release has been a disaster for my inlaws. They didn't take advice and handed their house over to the bank in 1997 for what has turned out to be a fraction of its worth. They are both in their 90's, frail, and unable to move into more suitable accommodation because the bank won't allow them to sell..

Please, please, take really impartial professional advice before doing this.

mick_the_gos

[STRIKE][/STRIKE]

magpiecottage wrote: »

I wrote a booklet on this last year which a number of IFAs now use when they advise on Equity Release.

Essentially there are two options:

Home Reversion - you sell all (or part) of your home in exchange for cash and the right to live in it for life. Once you die (or permanently move out) the property is sold and the home reversion company keeps the proceeds.

The price you sell for will be less than the open market value and if you die soon after will be poor value.

On the other hand, since you no longer own the house, it does not form part of your estate.

Lifetime Mortgage - you take a mortgage on your home but still own it. When you die, the property is sold and the mortgage paid off. The family receive any surplus.

Normally interest is added to the loan, though and interest will be charged on earlier interest. This means the loan can increase dramatically if you live a long time.

If you die after a short time, the legal costs will make the overall cost disproportionately large, though.

The house forms part of your estate but the outstanding debt can be taken off it.

Most such schemes also offer a "no negative equity" guarantee so if the loan grows to more than the sale proceeds the lender will stand the loss - but check this with the adviser.

A good adviser will suggest you discuss the wishes with your family but you do not have to.

In the end, the adviser's responsibility is to you, though, not your estate.

Hi.
I am considering a life time mortgage ER for my home we are at this moment living a pretty meagre existence. though we have a house worth 150K we have looked into ER and the bottom line is if we borrow 20K now and get rid of our depts. we will be £500 a month better of which in five years time we would of lived our hand to mouth existence but as long as nothing else crops up (which usually does) the dept. would be cleared. the problem is that I am not in the best of health and life is just passing us by. our home will be left to our daughter who if one or both of us live 20 years will have to get a mortgage for 75K to clear the interest and loan do you think we are being selfish and naïve by eating into our daughters inheritance we have looked hard at this and it would make our lives a lot easier and our daughter thinks we should go for it but we are still wondering if we are right to proceed.
Regards Mick

bigadaj

Inheritance should be looked on as a nice bonus, not a fundamental need, so if this is the best option for you now then proceed.

Is there any possibility you could downsize instead, this would allow you to maintain control of your house, otherwise you may be stuck there for the rest of your life.

pvt

jonesMUFCforever wrote: »

So now 30% of your house is £100k that you owe and the interest on top!!!

If you sold part of your house what is there to owe and pay interest on?

I think you're confusing home reversion with a rolled-up mortgage here - they're two quite different things.

Rafter

mick_the_gos wrote: »

Hi.
I am considering a life time mortgage ER for my home we are at this moment living a pretty meagre existence. though we have a house worth 150K we have looked into ER and the bottom line is if we borrow 20K now and get rid of our depts. we will be £500 a month better of which in five years time we would of lived our hand to mouth existence but as long as nothing else crops up (which usually does) the dept. would be cleared. the problem is that I am not in the best of health and life is just passing us by. our home will be left to our daughter who if one or both of us live 20 years will have to get a mortgage for 75K to clear the interest and loan do you think we are being selfish and naïve by eating into our daughters inheritance we have looked hard at this and it would make our lives a lot easier and our daughter thinks we should go for it but we are still wondering if we are right to proceed.
Regards Mick

Mick,

I wonder if there is a smarter solution which is to give the house to your daughter now and get her to take out a £20,000 mortgage (she may have to take a £25,000 mortgage as this is the minimum for many lenders) to clear your debts and reduce your outgoings.

The repayment on this mortgage would be around £100 per month which you could give her from the £500 per month you are saving.

The interest rate on a 5 year fixed rate standard mortgage is likely to be a lot lower than an equity release mortgage.

The risk for you is that she cannot keep up repayments, but that seems unlikely given the sums involved.

Things could get complicated if one of you needs care at some point in the future as the house may still be treated as yours if you havn't been paying a commercial rent on it to your daughter.

You would all seem to be better off though. Your debts are cleared and you have more income. Your daughter preserves more of her inheritance because you aren't paying a high rate on an equity release loan.

Worth getting some (paid for) advice from an independent advisor - you may even be able to structure it to ensure you house doesn't get sold to pay care bills.

Good luck

R.

holly_hobby

Home Reversion has no interest rolled up - as you effectively transfer a % of the property over to the provider, in exchange for the defined amount borrowe - thats it. The owner/their estate does not forgo entire property ownership, as stated in an earlier post on this thread, but only that % what has been lawfully transferred.

The loan is repayable upon death or entry into long term care, and under a HR scheme, the provider sells the property, returning any surplus capital on sale, to the individual or their estate. (although in some cases they will permit the individual/estate to sell on their behalf).

Lifetime Mge Arrangement - in this case, although interest generating, there is no requirement for payment of this during the term of the mge - with the accured interest rolled up onto the original debt. Obv, this will have a direct negative effect on the free equity, which may be completely eroded over time (which is why seeking a provider whom provides a no negative equity gte is essential, under both plans).

However, there are a couple of firms whom will permit the payment of monthly interest, either partially or totally, to effectively ringfence the debt and protect the free equity (of course market movements themselves may independtly affect it !)

Upon death entry into longterm care the individual or their estate is left to sell the property, and settle the charge as reqd.

Interest rates and fees are higher than traditional residential arrangements, and ERCs can be weighty.

If this is a income seeking exercise, your first action (as should be your advisers) should be to ensure that you are in receipt of all state benefits/assistance and due income (ie unclaimed pensions etc), as there may actually be no necessity to go down this road if all due income is in receipt.

It should also be considered that equity release will also effect qualification (either already in payment or future claims), for DWP means tested benefits/assistance.

Equity Release advice is a niche specalist area - and many advisers do not have the qualifications and authorisation to advise on such business.

The above are the very basics of guidance, and really going into this alone is not recommended - I would strongly suggest you seek advice from a practicing equity release adviser.

In the meantime here are some links to assist ....

Society of Later Life Advisers (SOLLA) - will give you details of ER advisers in your area whom (beyond just obtaining the qualifications read) have also chosen to be independtly audited and assessed, as to their proficienty in this area of advice. http://societyoflaterlifeadvisers.co.uk/

Equity Release Council ( prev SHIP) - guidance on equity release ... http://www.equityreleasecouncil.com/home/

Age UK - general discussion ..... http://www.ageuk.org.uk/money-matters/income-and-tax/equity-release/

Hope this helps

Holly