Equity release

bowf

Apologies if this isn't the correct forum, best one I could see.
My mother is looking to release some equity from her house as she would like some more liquidity.
The future plan for the house is that it will be left in her will to me, for us (my wife and I) to move into when our kids are grown up and we don't need our own big house any more.
Can anyone point out how equity release works and any pitfalls?

silvercar

The pitfall is that you would have to pay off all the loan (equity released and interest rolled up) to clear the charge and own the house.

brewthebear

Depending on how many years your mother lives after taking out loan, as said previous interest rolls up quite heavily and you could find absolutely no value left in home if it goes on for years.
A bad idea in the long run the only person to benefit is the loan provider.

kingstreet

Have a look at "RIO" which means you pay the interest, rather than have it roll-up.

Get professional advice on the options.

bowf

brewthebear wrote: »

Depending on how many years your mother lives after taking out loan, as said previous interest rolls up quite heavily and you could find absolutely no value left in home if it goes on for years.
A bad idea in the long run the only person to benefit is the loan provider.

That is the biggest concern for sure.

AnotherJoe

You might find the better financial option, if you can afford it, is to loan your mother the money with that loan documented and a charge against the house.
Reason for that is to prevent the council taking money that is effectively yours, if she needs care and the house needs to be sold.

silvercar

There are options eg you taking a loan on your property to give her a lump sum, if you can afford the repayments.

Otherwise it is time for a family discussion on what is more important, a) she takes an equity release loan
b) she downsizes to a place that is smaller and in not a nice area in order to release some equity.

Both those options mean you lose out on your future home. Option (a) gives you the option if you can afford it, (b) rules it out as soon as the place is sold. (a) keeps her in her nice home. I can't see any advantages of (b) unless the running costs of the bungalow are unaffordable even with the equity release.

There is a safety net these days; the total loan can't exceed the value of the property, so there is no danger of you not being able to afford to loan.

bowf

My mother claims there's an option where she can borrow an amount, let's say £50K against the house value of £200K.
Then she can pay back the interest on that £50K only, with the £50K being taken from the estate when she dies.
So the £50K never changes, you just pay back interest only on it.
She says a friend of hers has done this, through a company with "Canada in their name".
Does this sound correct?

silvercar

bowf wrote: »

My mother claims there's an option where she can borrow an amount, let's say £50K against the house value of £200K.
Then she can pay back the interest on that £50K only, with the £50K being taken from the estate when she dies.
So the £50K never changes, you just pay back interest only on it.
She says a friend of hers has done this, through a company with "Canada in their name".
Does this sound correct?

Certainly an option, though I guess she borrows more to start with to ensure she can afford the interest payments.

Silvertabby

bowf wrote: »

My mother claims there's an option where she can borrow an amount, let's say £50K against the house value of £200K.
Then she can pay back the interest on that £50K only, with the £50K being taken from the estate when she dies.
So the £50K never changes, you just pay back interest only on it.
She says a friend of hers has done this, through a company with "Canada in their name".
Does this sound correct?

What does she need the £50K for? And will she be able to afford the interest payments of (guess...) £200 per month from her income once the £50K has been spent?

bowf

Silvertabby wrote: »

What does she need the £50K for? And will she be able to afford the interest payments of (guess...) £200 per month from her income once the £50K has been spent?

Yes, she can afford the repayments on the interest alone.
Her pension income is decent, she just wants a lump sum to help out family and friends.
I would be one of the beneficiaries of a lump sum, I would contribute towards her interest payments.
This option sounds good, as it avoids the loan amount 'mounting up' to the point that releasing £50K ends up losing the house.