What are pitfalls to Equity Release

russjacks

This is our situation,

We have been short of money for many years, This site has helped me more than anyone can emagine. But we still don't go on foriegn family hols and have had no spare cash for the finer things in life.
The house is getting to a state were we need to start and spend money on it. ie new windows, and most of the rooms now need decorating all with new carpets.:eek:

Now heres the reason for this thread.
My mother in law :A owns her own flat all payed for, she has enough to get by on and is quite content. her flat will come to me and my wife when she passes away (god forbid). she has said to us she is quite willing to take out Equity on her flat and give it to us, (all her idea) thus allowing us to get all the repairs done and stop us from working our selfs into the ground trying to do everything. Plus she gets to see us use the money, in turn, as she says making her happy.

Now all we see is benifits for us, all repairs done, easier life, and maybe a nice holiday next year, at this point we can't stop smiling. :T

The big question is what are the pitfalls we need to know about, there must be some, we dont want to go into this with rose coloured specs. the flat will come to us anyway at some point, its just that some of the equity would be so usefull now.

Any help would be greatly appreciated.

Thanks

EdInvestor

russjacks wrote: »

the flat will come to us anyway at some point

Downfall number one is that it might not, if you do equity release.

This is because the interest on the equity release mortage compounds up against the value of the property. Thus, if your mother lives a long time and house prices do not rise much over the period, you may find that most of the equity in the property eventually belongs to the insurance company.Since they will have only let your MIL have around half the value of the property now, this might look like a rather poor deal down the track.:(

On the other hand, if your MIL had to go into care, the council might end up wanting most of the value of the property anyway to pay the fees.So if you had done equity release, it would look like a good deal - you can leave the insurance company and the council to fight over who gets what's left, meanwhile you've already had a big chunk upfront.:).

russjacks

yes i think i have allso left out a lot of info which might make all of this a bit more difficult.

First thing is the flat has allready been signed over to my wife to stop the goverment getting there hands on it. If in her old age, she has to go into a home. MIL not my wife that is.:o not sure what its called.

Second do's this make it a lot more difficult for my MIL to take out equity on the property. Or doe's it not allow her to do it at all as she is maybe not the owner.

dunstonh

First thing is the flat has allready been signed over to my wife to stop the goverment getting there hands on it.

That is deprivation of assets and can lead to prosecution at worst but normally the authority would claw it back into the means test. It is also still included in the inheritance tax calculation as your mother is receiving benefit from it.

It also makes your wife liable to capital gains tax if there is a gain on the property when it is eventually sold.

Second do's this make it a lot more difficult for my MIL to take out equity on the property.

Yes. She no longer owns the property so she cannot equity release on it.

russjacks

dunstonh wrote: »

That is deprivation of assets and can lead to prosecution at worst but normally the authority would claw it back into the means test. It is also still included in the inheritance tax calculation as your mother is receiving benefit from it.





No its all done above board though solicitors and help the aged. think its called tennets in common. i think

margaretclare

russjacks wrote: »

dunstonh wrote: »

No it's all done above board through solicitors and help the aged. think its called tennets in common. i think

Tenants in common. That means that both MIL and your wife own the flat. It isn't 'signed over to your wife'.

I'll let the experts explain all the ins and outs here. Basically, the main drawback of equity release - lifetime mortgage - is that the amount borrowed attracts interest in the same way a normal mortgage does, but it's not paid in the lifetime of the owner - it rolls up over time.

We did this, to release money to pay off an existing mortgage, and we're happy with it because we're not bothered about leaving an 'inheritance' behind us. However, it might be worth thinking seriously about whether you want this now or whether you prefer the inheritance when MIL dies.

HTH

Margaret

dolce_vita

OP - This may seem a silly question, but you do realise that "equity release" is just a loan and needs to be repaid don't you?

The only way of releasing your money from a property is by selling.

dunstonh

No its all done above board though solicitors and help the aged. think its called tennets in common. i think

Tenants in common works best with a spouse. I would expect a council to investigate ownership with a son/daughter as it looks like deprivation of assets. In effect your MIL has gifted 50% of her house so its still a gift. It doesnt matter that the legal side was done correctly if the concept is flawed in the first place.

http://www.futurecareassured.co.uk/questions.html

Can I give my home and/or other assets away to avoid having to pay for the costs of care?

If there is an immediate need for care, this is not recommended as under "deprivation of assets" rules the local authority is entitled to take assets that you have deliberately given away into account as though you still owned them. In the event that assets had been gifted away before any need for care arose, the onus would be on you to demonstrate that assets had not been given away so that you could not afford to pay for your care. There is no time limit as to how long after any asset is given away that a Local Authority can still take them into account and different local authorities take a different view on this. So even the suspicion by the Local Authority that this could have been the reason for disposing of the asset could mean that gifting assets away fails.
Notwithstanding this, it is also worth bearing in mind that if you did successfully gift assets away unchallenged and the need for care ever arose your choice of care would be restricted by what the Local Authority would be willing to pay for, which may fall considerably short of what you yourself would choose

http://www.ucarewecare.com/nursing-home-fees.php

Legislation under section 47 of the Community Care Act states that anyone requiring care will be assessed by their local social services and if that assessment confirms care is required a means test will be carried out, during which you must disclose full details of your assets. These will include property currently or previously owned, whether jointly, or as tenants in common to determine if you or Social Services should pay for care and nursing home fees.

russjacks

dolce_vita wrote: »

OP - This may seem a silly question, but you do realise that "equity release" is just a loan and needs to be repaid don't you?

The only way of releasing your money from a property is by selling.

yes i do, thats why i am asking about pitfalls rather than going stright in to it. but will the benifits we will get now outwiegh what is to come in the future if we go ahead with it. i know its a loan but you dont have to make repayments untill MIL dies. We wont get what the property is worth but we gat a lot happier life now without so many worries, do you see what im getting at, in anyones opinion doe's it all seem like a good idea. many thanks.

margaretclare

russjacks wrote: »

yes i do, thats why i am asking about pitfalls rather than going stright in to it. but will the benifits we will get now outwiegh what is to come in the future if we go ahead with it. i know its a loan but you dont have to make repayments untill MIL dies. We wont get what the property is worth but we gat a lot happier life now without so many worries, do you see what im getting at, in anyones opinion doe's it all seem like a good idea. many thanks.

If you're certain you don't mind that the property won't be worth so much when MIL dies (because there's a lifetime mortgage on it that has to be paid) and you eventually sell it, yes, it could be a good deal.

The other thing to be certain of is about the tenants-in-common scenario which dunstan has pointed out above. In addition, some lenders haven't always been willing to lend on flats, I seem to have heard somewhere.

It's not at all certain that MIL will need to go into a home, and if she doesn't, then the whole thing of 'deprivation of assets' does not arise. Everyone talks about older people as if it is inevitable that they all need to end their days in a care home - not the case at all, it's a minority, something like 5% I believe.

HTH

Margaret

EdInvestor

russjacks wrote: »

First thing is the flat has allready been signed over to my wife to stop the goverment getting there hands on it. If in her old age, she has to go into a home. MIL not my wife that is.:o not sure what its called.

Second do's this make it a lot more difficult for my MIL to take out equity on the property. Or doe's it not allow her to do it at all as she is maybe not the owner.

If the whole property has been soigned over to your wife then you wont be able to do equity release at all because it is not offered to people under around 60.

If the property is part owned by MIL and wife under the tenants in common rule then it may be possible to do equity release on MIL's portion but obviously you would get a lot less (perhaps half of the MIL bit).On the other hand the terms of the loan are normally that it is payable on death or going into care through the sale of the property.

So the part ownership by wife might rule it out.

If you need to give the property back to MIL in order to do equity release, note that your wife will be subject to capital gains tax on the increase in value of her portion. There are quite a lot of allowances however which can reduce the tax payable and also the law is changing next year to bring the rate down a lot.

It is really amazing how many people appear to have been "advised" by solicitors to sign over property to relatives to avoid care costs and IHT, without being told about the 'voluntary deprivation of assets' and 'gift with reservation of benefit' rules, not to mention that the recipient will incur capital gains tax when the property is sold.