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My parents want to release about 25% of the value of their house and give my sister and I a lump sum now. Their thinking is the money is now useful to us now than in the future. We have a sizable house extension coming up so we would use this to pay for that.
I understand how the interest works but not had a chance to read up on tax implications or risks. Interested in collective thoughts. For what its worth I'm 40 and parents are around 70 and in good health. Their house is in South England, I'm in Scotland.
My mum did it (to pay for a place abroad) and she's pretty switched on, so it can't be a massively bad thing to do.
We're going to do it one day because we don't have any kids to leave anything to, so it kind of makes sense for us.
I have no idea of the actual details though so this probably didn't help at all.
Be careful and understand what it really is. If you go into it with your eyes open, then fine.
The concern is around some older folk who may not understand fully and get diddled into it. Properly dealt with, it is just a decision about cash now versus locked in value later. Badly handled en masse it could easily be the next PPI.
I 'think' for tax if your parents survive for seven years there's nothing to include in inheritance liability.
Suppose its the question do I want £xxx thousand now or £yyy thousand in a few years time.
My MIL did this and twelve years down the line the 200K she borrowed is now worth 415K in interest (rate fixed at 8%, a good deal back then!). Compound interest is mental....beware!
^that for the inheritance tax angle
I'm not a finance guy but looked at some stuff for my MiL, and there are two broad types.
One is a lifetime mortgage (loan) where you borrow a % of the property value; just be aware that the x% they are borrowing against might not mean they continue to own 100-x% of the house; the interest on the forwarded sum is then repaid out of the house's value when it is sold. So if the interest rate went up, and house prices declined, and they lived for a long time (longer compound interest) then you could end up owing the rest of the house to cover the interest. The deal is that it isn't paid until cashing in time (death or selling for long term care in my MiL's case) and the sum owed can never (FCA rules) be more than the value of the house when sold (that's the loan company's risk)
Second is a home reversion; they offer you a lump sum in return for a % of the house, and then claim that % at cash in. So if the house increases substantially in value by the time they check out, the amount they own while still say 25% of the house could be way more than they gave you in the first case. Plus, if they give you 25% of the value of the house in cash, they'll want to own more than 25% of the house anyway to cover their interest, etc.
So just check out what they are signing up for, because while the money now may be nice, if it ruins the long term inheritance it might not be the most economic way to 'borrow' money for your extension.
How do these work when it comes to paying for your care.
Is it a convinent dodge ?
welll....... depends how you see it. When it comes to paying for long term care they can dig into your assets to get you to fund it, including selling your house (remember the tories manifesto backtrack over dementia tax)
So swapping a % of your house for cash by equity release and then fwapping that away on sanatogen and geriatric hookers means you can't then spend it on care, but if you swap it for cash and that then sits in the bank for them to draw down on as if an income they could. But same could be said for downsizing and getting the cash out by that.
How do these work when it comes to paying for your care.
Is it a convinent dodge ?
Nope, you either have an asset (house) or cash (equity release), either of which could be used to pay for care. Unless you piss all the cash up the wall then need care, in which case there's nothing left..
so how does the no negative equity guarantee work when it comes to paying for care? Is the remaining equity ring fenced? If they survive a long time and my released equity has become 300k owed, is that money/value protected from being used for care fees?
I guess the big benefit is no repayments now, so we end up with more usable cash whilst kids are still young and spendy, with the downside being it probably costs more in the long run. But if that long run is them living another 20years, by then kids will be away from home and mortgage paid off so probably not feel as much benefit from the money anyway.
Equity Release you say? The next PPI scandal you say?
Never a truer word spoken.
Listen to this and make you mind up.
https://www.bbc.co.uk/programmes/b0bd8h78
As I understand it, and I am not a mortgage advisor....
once you've swapped part of the house for cash, then the finance company owns that, and therefore it's no longer relevant for the purposes of care.
However, on the day of the deal instead of an 800k house you now have a 600K share of an 800k house, and 200k in cash. Still 800k.
Same as if you'd downsized into a 600k house and took 200k in cash.
If you've then spent that 200k on a world tour or whatever..... they can't get to it. If they've loaned it to you and your sister..... not sure.
If anything, keeping it as a property protects them a bit more, because (as I understand it) they can't force you to sell the house to pay for care if that would mean your other parent was turfed out - in that case they can stay put and the care costs are tallied up and then paid once the house is no longer needed. If you had a smaller house and a pile of cash, they can get to the cash there and then.
But (again) IANAIFA
However, on the day of the deal instead of an 800k house you now have a 600K share of an 800k house, and 200k in cash. Still 800k.
Although the interest on the £200k will rapidly rise and eat up a lot of the remaining equity....
Footflaps..... you got it!
Compounding interest means that in some cases taking out a loan for 30% if the value of a property will see the loan value increase to 100% of the value of the entire house in 18 years.
Remember that an Equity Release is not paid back month by month. Rather, it is paid back when the property owner dies or goes into care.
In other words if today, you take out an Equity Release for 30% of the value of your property, in 18 years time you will owe 100% of the value of your property.
So if your parents live for more than 18 years, they will owe the ENTIRE value of the property to the insurance company.
Your decision is this....... do you want £25k or whatever your folks want to give you NOW through equity release OR do you want them to live in the house debt free for the rest of their lives safe in the knowledge that when they pop their clogs, YOU and your siblings inherit the ENTIRE house and can split it equally.
£25k now or £150k in the future? Decisions, Decisions!
Ohhh... and if your folks want the equity release money to buy a new car or do a round-the-world trip etc then surely there are other financial products such as a personal loan that can help them with freeing up some cash without putting their house on the line.
My parents and aunt/uncle did this on their homes. As said above the usual "equity release" (I prefer the term the Yanks use - Reverse Mortgage - which sort of explains it better) is a high compound interest loan/mortgage which can soon ramp up. In my aunt/uncles case it ramped up to the value of the home when they passed away last year.
For my parents it was ideal. They spent some of the money doing up their house and holidaying abroad rather than worrying about money. My mum then had enough money to cover her care home costs before she passed away this year. My parents left us almost nothing but had a great retirement, which is by far the best outcome for me.
In terms of monies gifted I believe that the OP's parents would have to live 7 years after the gift to avoid any tax implications.
You need to put some figures down and make a few assumptions (inflation, int rates, expected asset growth) to measure value and compare equity release to an alternative funding solution. The answer is "it depends" but obviously not doing precise actuarial due diligence including all parameters can lead to disappointment...
Remember that an Equity Release is not paid back month by month. Rather, it is paid back when the property owner dies or goes into care.
In other words if today, you take out an Equity Release for 30% of the value of your property, in 18 years time you will owe 100% of the value of your property.
So if your parents live for more than 18 years, they will owe the ENTIRE value of the property to the insurance company.
Although presumably if they downsize, the loan is repaid (and thus interest stops accumulating). Whilst I understand why the OP's parents might want to do it - I'd not be comfortable taking it from my parents. In his case I'd wonder whether they might be looking to downsize (or move to a single level property) anyway, if they might relocate to Scotland (where care rules are slightly different and property is often much cheaper), etc.
The answer is “it depends” but obviously not doing precise actuarial due diligence including all parameters can lead to disappointment…
Actuarial DD isn't going to avoid disappointment. Actuaries work on "averages/distributions" nobody can confidently predict how any individual will get on, only how a population of similar individuals will do, and likewise with the economy / inflation etc - they can share the risk around, not something an individual can do.
How much are we talking?
200k from 800k property, split 100k each between my sister and I.
The property is a bungalow (I know, silly prices) and they are not likely to want to move out or downsize unless it is in to care as they live where they live.
For tax they need to live for 7 years.
if it is equity release then the interest will accrue and everything be paid for out of the estate (well the property). Depending on the deal you get and how long you live this may end up being everything you own when you die being sold off to pay the loan and associated death costs
i would imagine that there is some kind of monitoring of your assets and if it becomes apparent you have less than the loan they find a way to turf you out and get their money....
If they need to downsize in 10-15 years they may find they don’t have the equity to be able to afford this...
I think the basic premise is you get some cash now but will forfeit the rest of the value of the property. Also if they give you the cash and something needs to be fixed they have probably lost their only means of raising cash to fix it.
I insure equity release companies should they get accused of misusing-selling - risky business as you can imagine and requires some pretty in depth underwriting.
There are some very good reasons for doing it and some silly reasons for doing it. The current Age Partnership adverts really wind me up as they are essentially like payday loan ads.
ER is a valuable IHT planning tool (call it tax dodging if you like but it is entirely within the law currently) but as others have stated the interest soon adds up. It is also useful if cash is needed urgently - an illness for example.
Imo if they are just wanting to give you a bit of cash that’s borderline - particularly if not done in conjunction with a full financial review to make sure it forms part of a coherent strategy.
Best thing for your parents to do is get a good adviser to sit down with them and you and go through the pros and cons. A good adviser should be looking to refuse the deal if they do not think it’s in your parents best interests (yes they do exist).
As a suggestion (strictly in my capacity as a random forum member and not a professional giving advice) I’d give The Right Equity Release a call. Very professional - good enough for me to insure - and have a good chat with them.
presumably this business model relies on the house value exceeding the value of the equity released plus interest - could get interesting if the housing market crashes!!
presumably this business model relies on the house value exceeding the value of the equity released plus interest – could get interesting if the housing market crashes!!
which is why they won't lend 100% and are often quite conservative on the LTV.
In short, it's not free money.
Not releasing anything really, just swapping equity for a loan, putting you in (or more in) debt. Then you're gambling on the market increase being better than the loan interest, or just don't care and let your offspring deal with it when you pop your clogs.
If you need cash though, it's a way of getting a loan.
Equity Release you say? The next PPI scandal you say?
Yeah, given the amount this stuff is pushed to the bored elderly on daytime telly as if they can magically turn their property in to loads of dosh and "still own the house" with no hassle.
i would imagine that there is some kind of monitoring of your assets and if it becomes apparent you have less than the loan they find a way to turf you out and get their money….
No, from what i read the value of the loan is capped on the value of the asset when that time comes. If you owe less than the value of the house, then there could be some residual into the estate. If you owe more, then tough, the company can only get what the asset is worth (sells for I assume)
But that might leave the estate with nothing to pay other expenses (funeral, for example) and IDK whether the eventual value of the property is the sale value, or the sale value minus associated costs such as legal fees (I'd assume the latter but would be an assumption)
presumably this business model relies on the house value exceeding the value of the equity released plus interest – could get interesting if the housing market crashes!!
The parents won't care as it's only on death it becomes an issue (Buddhists / resurrectionists may disagree) and as above, the o/s amount can not exceed the value. But it could be an issue for the finance companies if they get their sums wrong and can't recoup their outlays.
https://www.equityreleasesupermarket.co.uk/General/faqs.html
Go onto Martin Lewis's money advice pages ....
There are lots of reasons why it is a very bad idea ....
the best way to release equity is to move house - I understand that your mum and dad are emotionally invested in the house but equity release is something I would never do; when I was doing a financial sales course many years ago it was discussed and even ex Salesmen running the course said they were a bad idea (one of whom I would not trust with a bargepole to not sell dodgy investments)
Running the numbers on this is proving quite interesting. As we are planning an extension we will need to borrow money anyway. So I'm looking a the cost of borrowing over 20 years versus equity release and assuming my parent live 20 years (that is the weird bit, speculating how long my folks will live for)
Some ER deals are quite good, less than 4%. Critically this is fixed for the life of the plan, albeit on compound terms. Any loan I take out to find the extension wouldn't be fixed. So whilst the ER release has a total repayment amount that is significantly higher, that is based on the assumption that interest rates remain low. ER then also give the benefit of not affecting our monthly outgoings now, whist kids are still around and expensive
presumably this business model relies on the house value exceeding the value of the equity released plus interest – could get interesting if the housing market crashes!!
Interesting you should say this. The PRA have just issued a warning to the life offices that loan the end cash on ER saying they need to check their actuarial modelling and reserving as they think there may be issues in the future.
Yes I can see how a low LTV % would help keep the risk down but there’s still an awful lot of variables at play - interest rates, life expectancy, property market fluctuation. I can’t help feeling this is another situation where sooner or later the music is going to stop and leave some people with some awfully big write downs.
I listened to the Radio 4 programme linked above. Interesting stuff, it does sound very risky indeed, not for the consumer directly but for the finance sector as a whole. It was a really interesting listen.
Hm. How about gift and lease back at market rent?
Would that be a better option?
I think the main risk is people taking out ER with a small LTV and then finding out they have no equity left after 10-15 years as the compound interest has eaten it all up. The ER companies will be fine, they own the house at the end of it, so will get their money back.
The current interest rates are more favourable that those that are linked to some of the horror stories. LV for example are quoted 3.7% APR. Makes the calculations slightly less intimidating.
I bloody hate the Equity Release adverts, most come across as doing it to help you out. No it’s not, it’s so they can make a large profit. I hope they get hit with the PPI compensation hammer.
I bloody hate the Equity Release adverts, most come across as doing it to help you out. No it’s not, it’s so they can make a large profit. I hope they get hit with the PPI compensation hammer.
Unlikely for most firms. Their compliance these days is very good with beneficiaries of the estate being invited to meetings, detailed reasons why, detailed fact finds (we produced one to guide ER companies and it runs to 25+ pages) etc.
It is also heavily regulated with the FCA keeping a very close eye on it. In 20 odd years of insuring ER firms we have seen a few attempted claims but can’t remember off hand ever paying out on one.
It is a very good product when sold properly and for the right reasons.
@dannybgoode I agree. So some people who want to have some extra money for their retirement and can’t/don’t want to downsize / sell it a good product as long as they do their sums. This was my parents experience and they had no regrets.
OP - personally if you can afford the extra mortgage cost for your extension yourself and want it that much then go for it, your parents are still relatively young and anything could happen between now and them departing this world that being tied in to an equity release could cause you or them problems & perhaps your children would appreciate an inheritance further down the line more than cash being spent on them now? IMHO etc etc