Is there a 'good' way to release home equity

skyblues87

I have a distant relative who is retired and living in his mortgage free property. He's not broke but could be enjoying his retirement more with an increased disposable income - couldn't we all!

He has no close relatives and as far as anyone can tell is planning on leaving his (£400K plus) property to charity. He insists moving isn't an option so is there anyway that would be recommended to release equity?

There seems to be a constant bombardment of adverts for this type of thing but I am very wary of them and wouldn't want to recommend something that could end up with him in a worse position than he's in now. 

xylophone

Does he want to release equity?

If so, he might find it helpful to read 

https://www.ageuk.org.uk/information-advice/money-legal/income-tax/equity-release/ and consult a specialist IFA.


https://adviserbook.co.uk/    He would tick "confirmed independent" and "equity release" when the menu comes up.

Nebulous2

I dislike the terminology around this. 

The phrase 'equity release' conjures up images of a caged tiger - pacing, pacing, dying to be freed.

However you aren't releasing anything. You are taking on debt, with all its connotations, and offering your home as a hostage for its repayment. 

Having said that, your relative sounds like an appropriate candidate for it, and products have moved on. 

Has he considered downsizing? Dependent on location, does he need a £400k house? 

I think you may find his psychological 'red lines' are the biggest barrier to progressing any of his several options. 

skyblues87

Thanks both. He does want the money if possible but like me has a preconceived ideas. I'm working on the basis there is a catch with these type of products, his view of them is even worse.

He absolutely doesn't need to stay in a house the size he has. There's some fantastic over 55s flats near him that would be perfect with the option to add care packages should that be a requirement in the future. He could buy one of those and have over £200K left over but is adamant he doesn't want to move. 

Guess its a case of trying to get him to speak with an appropriate advisor but he's against that at the moment as he views them as a scam. Was hoping to unearth some facts to put in front of him to at least persuade him to speak to someone, of course assuming they aren't actually a scam.

Linton

Releasing equity from one's home is in my view a reasonable option for retired people with no close relatives.  Like any other borrowing it is a useful financial management tool for someone who has a reasonable amount of  wealth but possibly a danger for someone who desperately needs the extra money.

The main products available are mortgages without a fixed duration.  They end when the borrower dies or leaves the house permanently to go into care and/or the house is sold.  The loan is paid off from the proceeds of the sale.  There are 2 options:

1) Retirement Interest Only (RIO) Mortgage. Depending on age one should be able to get a mortgage for up to about 50% of the equity in the house.  The interest rates I have been quoted recently are about 4% which would need to be paid just like any other IO mortgage.  The capital is repaid when the house is sold. Such a mortgage is suitable for someone with spare income but insufficient capital for their needs.
 
The downside which has caused me to move to full ER is that it seems interest rates can only be fixed for a limited period.  So you run the risk of much higher interest rates in the future which could be a problem if your available income is limited.

To get a RIO one would need to pass an affordability check - for a couple it would be necessary to show that the interest was affordable after the death of one of them.

2) Equity Release.  This is similar to RIO, except that the interest can be added to the loan so there is no ongoing payment required and therefore no requirement for affordability checks.  The maximum that can be borrowed is less than for a RIO but like a RIO depends on one's age and the interest rate depends on the LTV.  For a 25% loan I am paying 3% fixed for the duration of the mortgage.

The danger is the compounding of the interest in the house which may limit one's options in real old age.  But at 3% interest on 25% of the equity after 20 years the size of the loan would still be less than 50% of the current value of the house.  Of course after 20 years the house value would probably be very different.

In either case it will be necessary to go through an advisor.  In my view one should use a suitably qualified IFA who is also a mortgage broker before taking such a large step.

Regarding scams: following problems in the past ER is now regulated through the FCA with significant safeguards and major companies have entered the market.  Both L&G and LV are important players.

In the past Home Reversion where the lender buys some or all of your home was frequently used to release equity.  It was here that the major problems occured.  Home Reversion seems to have been largely replaced by lifetime mortgages.  When I was looking into ER it never appeared in my researches.

Any specific questions?

trevjl

My mother did ER when my father died suddenly at 68 (20 years ago) and the finances were in  mess. At the time I was not in a position to do much, so she did ER. She sold up and it was all settled a few years later. There were no issues at all.
My mother in law did it last year, all very straight forward and the rates were reasonable I thought. The hardest part was convincing her that there really was no need to leave anything behind.

Sea_Shell

What are their long term plans as their health fades and they need maybe home carers or adaptations etc.

Will they be self funding or needing to rely on local authority funding?

Does money in the bank from ER count as "savings" if a financial assessment is carried out.

AIUI, equity remaining IN the house would be disregarded in any assessment for funding.

westv

With no inheritance needs, do wonder whether I should include ER as a definite part of my retirement planning or as a possible extra depending on how things go.

mark55man

OP, it seems that your relative may be making trouble for himself, by being so untrusting.  I'm not denying there are scams, but there are those with bank accounts etc etc.  I also worry that he may end up going to a dodgy advisor simply to avoid paying an advisor the going rate.  

The posters above have presented both justification for the idea in principal, examples of where a well informed decision to do this was made, and provided examples of two major players in the financial market who are doing this.

I hope you can help reach a good decision.  I certainly admire the decision (and would probably do the same in those circumstances) to leave money to charity, but not at the cost of an impoverished retirement. 

jamesd

Linton wrote a good description, with RIO being an option introduced a couple of years ago. The traditional equity release remains available and can be ideal for a person who isn't strongly motivated to leave an inheritance. There are also products that let you draw money regularly.

This is a field primarily covered by suitably qualified mortgage brokers.

Most of the bad press seems to be from children who thought they would inherit then found that they would inherit less or nothing.

It used to be possible to buy equity release where any shortfall would have to be paid from your estate. Sadly these no longer seem to be available because they would permit higher borrowing levels due to decreased risk for the lender. These would be an even better product for a person with no inheritance motive. The restricted poorer products are advertised as having a no negative equity guarantee.

I fully intend to have a mortgage throughout retirement so long as something suitable is available. No inheritance motive at all.

Sea_Shell

Personally, I'm not against the idea, in the right circumstances and I'd do it if it meant a more comfortable old age.  My beneficiaries can go whistle!!

I do like the idea of a flexible withdrawal product.  If you can apply for a "maximum" limit, in principle, and then just take cash on an ad hoc basis, with interest either payable or accruing.   Like having a large credit card limit, but secured against the house.