Releasing Equity in home...worth it?

[Sheepshanks]

My FIL did this (without consulting the rest of the family) some years ago and I don't know the fine details but in round terms he got 25% of the property's then value in return for 50% of the property value on disposal / death.

Snag was that MIL promptly died and he didn't want to stay in the house - mainly for practical purposes, it had a massive multi-level garden and that head been her thing. But once the equity release was settled he didn't have enough left to buy another reasonable house and borrowing more was looking messy. He could have carried the equity release to the new house but it would then have been a far larger % of its value.

So his family took a loan to cover the gap and he gifts the money back every year to cover it.

[drainbrain]

boombastictiger said:

Hi Guys,

In relation to releasing equity in a home I have understood the following;

- You can take a 100% mortgage and pay no rent or anything for life and when you die the bank claims the house.

OR

- You can release a percentage of equity in the house from a specialist company/bank product which they pay rent on and then when you die they claim the house.

Age generally above 55-60.

So my question is have i understood it right what are the Real pros vs cons?, as in some ways it sounds to good to be true. Am thinking about this for my in laws as a solution for them.

Cheers

Sabs

Edited by boombastictiger on Friday 22 July 13:47

Sabs: The broad aim is to get money for older people using equity available in property they own.

It's a specialist area which is best advised on by a proper expert in this niche area of property related borrowing. Such expert advisers exist, but so too do many not-so-expert (though properly licensed) advisers.

To give you an outset idea of the most common methods of achieving the aim, here's a not bad but very simplified synopsis from wikipedia :

• ************************

Types of arrangement:

Lifetime mortgage: A loan secured on the borrower's home (a mortgage loan) is made. Compounded interest is added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower (or borrowing couple) dies or moves out (perhaps into a care home). The borrower retains legal title to the home whilst living in it, and also retains the responsibilities and costs of ownership.

Interest only: A mortgage is made, on which the capital is repaid on death. Interest payments are paid whilst the borrowers remain in the property.

Home reversion: The borrowers sell all or part of their home to a third party, normally a reversion company or individual. This means all or part of their home belongs to somebody else. In return, the borrowers receive a regular income or cash lump sum (or both) and they continue to live in their home for as long as they wish.

Shared appreciation mortgage: The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property value. The borrowers retain the right to live in the property until death. The older the client the smaller the share required by the lender. This type of arrangement is no longer available in the UK.

Home income plan: A lifetime mortgage where the capital is used to provide an income by purchasing an annuity often provided by the lender, which is often an insurance company.

UK Equity Release Schemes: Generally available to over 55 year homeowners with sufficient equity in their property, who can opt to release some of the capital from their homes via an equity release arrangement from specialists lenders.

• ***************************

Again…..proper specialist advice is required.

IF you get said specialist the process is tedious. Early in it, if he's a good'un, relatives/potential beneficiaries of the borrowers' estate will be asked to participate in the process and will be given an understanding of the process and its implications. Then to determine which type (if any ) of product is suitable, a lengthy and detailed fact find of not only the borrowers but possibly also the interested parties as well will be undertaken.

Many "financial advisers" or mortgage brokers have the capability and licence to organise these products. But the one you need is one who SPECIALISES in them and in the tedious and painstaking process of analysis to determine which product of which type (if any at all) is best suited to the individual circumstances.

YOUR job, therefore, becomes locating that best adviser. NOT a well referenced IFA or mortgage broker. A well referenced specialist expert independent adviser of equity-release type products for older borrowers.

Edited by drainbrain on Sunday 24th July 20:47

[Roger Irrelevant]

JulianPH said:

I think equity release is going to become an integral part of retirement planning now that pensions are free of IHT.

You can save through your working life into a SIPP without paying any tax then ring fence this money (taking the tax free cash if required) and draw down another tax free income from your home.

What is the point of paying full tax on pension withdrawals and leaving your kids an IHT bill on the house when you can draw a tax free income from the house and leave the kids and IHT free inheritance from your SIPP?

Obviously this need PROPER planing from a specialist adviser as there are other factor to consider (not least your IHT allowance). But for larger values there is a lot of merit.

I think the subsequent posts illustrate why this may not be a good idea in a lot of cases - the rub is that while the income from equity release may be tax free, you are effectively borrowing that income at a reasonably high interest rate over a long period. If you are in your late 50s and take £20k in equity release now, by the time it comes to pay the loan back that could well have compounded to three or four times that amount. In other words, if you financed your retirement through equity release then from a million pound house you might only be able to receive around £400k in income, quite possibly less. It's quite an inefficient way to get an income; the interest charges would often outweight the income tax and IHT you'd save. In any event, if you are fortunate enough to own a high-value house outright then I think it would almost always make more sense to release equity by downsizing rather than going for a lifetime mortgage.

[sidicks]

Roger Irrelevant said:

I think the subsequent posts illustrate why this may not be a good idea in a lot of cases - the rub is that while the income from equity release may be tax free, you are effectively borrowing that income at a reasonably high interest rate over a long period. If you are in your late 50s and take £20k in equity release now, by the time it comes to pay the loan back that could well have compounded to three or four times that amount. In other words, if you financed your retirement through equity release then from a million pound house you might only be able to receive around £400k in income, quite possibly less. It's quite an inefficient way to get an income; the interest charges would often outweight the income tax and IHT you'd save. In any event, if you are fortunate enough to own a high-value house outright then I think it would almost always make more sense to release equity by downsizing rather than going for a lifetime mortgage.

Clearly the key here is the rate of interest charged on the borrowing compared to the rest of interest you are expecting to earn to repay the borrowing (in this case it will probably be the property). If the former is greater than the later then over a long duration this will severely impact the remaining house equity available.

[rufusgti]

My grandparents signed a horrific deal around 20 years ago on their property in Bath. They were offered and hastily accepted 25% of the value of the property which was £17k, for 25% of the value when they die.

My gran has passed and my grandad is 88, the value now is circa £475k so the company that knocked on their door and talked them into it has done very well. The worrying thing is they also have the right to handle the sale. Which I find concerning as there's likely more scope for them to add charges and costs at that point.

[skeeterm5]

At the risk of being slightly controversial - the only people "losing out" here are the people hoping to inherit the value of their parents homes.

For me, if my mum and dad want money in their retirement then this is a legitimate way of raising funds at zero risk to themselves - it is their money tied up in their house - so good luck to them.

S

[Sheepshanks]

rufusgti said:

My grandparents signed a horrific deal around 20 years ago on their property in Bath. They were offered and hastily accepted 25% of the value of the property which was £17k, for 25% of the value when they die.

My gran has passed and my grandad is 88, the value now is circa £475k so the company that knocked on their door and talked them into it has done very well.

The company hasn't done well yet, and that level of value increase is unusually high.

I'm surprised it's the same percentage too - I'm sure in my in-laws case they got 25% in return for 50% of the value.

[Roger Irrelevant]

skeeterm5 said:

At the risk of being slightly controversial - the only people "losing out" here are the people hoping to inherit the value of their parents homes.

For me, if my mum and dad want money in their retirement then this is a legitimate way of raising funds at zero risk to themselves - it is their money tied up in their house - so good luck to them.

S

Completely agree - if you've had a windfall in the form of rampant house price inflation then it seems a bit odd to just sit on a £x00,000 asset until you die. My folks, like many baby boomers, are sitting on a theoretical fortune thanks to their farmhouse now sitting in prime London commuter territory (when I were a nipper 30 years ago it was a total backwater). If they went for equity release then they could spend their whole retirement living the life of riley, and I'd encourage them to do just that. It's their house, they paid for it so if they want to reap whatever benefit they can from it then good for them, my siblings and I can look after ourselves.

[Ozzie Osmond]

If I'd spent my life working hard to buy a house and plan for retirement I'd have no more enthusiasm for handing the cash to an "equity release! shyster than I do for handing it to the Treasury.

If people have got a decent house it's often massively more efficient to downsize and simply spend the "change". It rarely makes sense for oldsters to soldier on a family home that's now too big for them. I cannot stand equity release and would try to avoid it like the plague - however, I recognise that it can be an appropriate for some people.

With equity release the folks are still stuck in a corner once they've spent the equity released.

[sidicks]

Ozzie Osmond said:

If I'd spent my life working hard to buy a house and plan for retirement I'd have no more enthusiasm for handing the cash to an "equity release! shyster than I do for handing it to the Treasury.

If people have got a decent house it's often massively more efficient to downsize and simply spend the "change". It rarely makes sense for oldsters to soldier on a family home that's now too big for them. I cannot stand equity release and would try to avoid it like the plague - however, I recognise that it can be an appropriate for some people.

With equity release the folks are still stuck in a corner once they've spent the equity released.

We are typically talking about asset rich, income poor individuals (or couples), needing or wanting to raise funds.

1. Clearly a conventional loan isn't appropriate as rarely do these people have sufficient income to repay and loan and there is a material risk of the loan not having been repaid prior to death.

2. Downsizing is an o-toon for some people, but this is costly in terms of fees etc and not always practical

3. The other other option then is a loan that is repayable from future equity in the property, however in most cases the repayment amount is fixed, not linked to the house value.

[boombastictiger]

Thanks for everyones feedback so far, it seems like this can be confusing and not so straightforward.

[boombastictiger]

drainbrain said:

Sabs: The broad aim is to get money for older people using equity available in property they own.

It's a specialist area which is best advised on by a proper expert in this niche area of property related borrowing. Such expert advisers exist, but so too do many not-so-expert (though properly licensed) advisers.

To give you an outset idea of the most common methods of achieving the aim, here's a not bad but very simplified synopsis from wikipedia :

• ************************

Types of arrangement:

Lifetime mortgage: A loan secured on the borrower's home (a mortgage loan) is made. Compounded interest is added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower (or borrowing couple) dies or moves out (perhaps into a care home). The borrower retains legal title to the home whilst living in it, and also retains the responsibilities and costs of ownership.

Interest only: A mortgage is made, on which the capital is repaid on death. Interest payments are paid whilst the borrowers remain in the property.

Home reversion: The borrowers sell all or part of their home to a third party, normally a reversion company or individual. This means all or part of their home belongs to somebody else. In return, the borrowers receive a regular income or cash lump sum (or both) and they continue to live in their home for as long as they wish.

Shared appreciation mortgage: The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property value. The borrowers retain the right to live in the property until death. The older the client the smaller the share required by the lender. This type of arrangement is no longer available in the UK.

Home income plan: A lifetime mortgage where the capital is used to provide an income by purchasing an annuity often provided by the lender, which is often an insurance company.

UK Equity Release Schemes: Generally available to over 55 year homeowners with sufficient equity in their property, who can opt to release some of the capital from their homes via an equity release arrangement from specialists lenders.

• ***************************

Again…..proper specialist advice is required.

IF you get said specialist the process is tedious. Early in it, if he's a good'un, relatives/potential beneficiaries of the borrowers' estate will be asked to participate in the process and will be given an understanding of the process and its implications. Then to determine which type (if any ) of product is suitable, a lengthy and detailed fact find of not only the borrowers but possibly also the interested parties as well will be undertaken.

Many "financial advisers" or mortgage brokers have the capability and licence to organise these products. But the one you need is one who SPECIALISES in them and in the tedious and painstaking process of analysis to determine which product of which type (if any at all) is best suited to the individual circumstances.

YOUR job, therefore, becomes locating that best adviser. NOT a well referenced IFA or mortgage broker. A well referenced specialist expert independent adviser of equity-release type products for older borrowers.

Edited by drainbrain on Sunday 24th July 20:47

Thanks for this Deadbrain, very helpful and makes logical sense.

[JulianPH]

Roger Irrelevant said:

I think the subsequent posts illustrate why this may not be a good idea in a lot of cases - the rub is that while the income from equity release may be tax free, you are effectively borrowing that income at a reasonably high interest rate over a long period. If you are in your late 50s and take £20k in equity release now, by the time it comes to pay the loan back that could well have compounded to three or four times that amount. In other words, if you financed your retirement through equity release then from a million pound house you might only be able to receive around £400k in income, quite possibly less. It's quite an inefficient way to get an income; the interest charges would often outweight the income tax and IHT you'd save. In any event, if you are fortunate enough to own a high-value house outright then I think it would almost always make more sense to release equity by downsizing rather than going for a lifetime mortgage.

Having looked into it more since my first post I agree 100%.

I had never really looked at this market before and am only aware of the the tax implications.

I had assumed (wrongly) that equity release would be akin to a 'property annuity' whereby you gave up your interest in the asset in return for a lifetime income. This would, it appears, make for a far better product as surely most people are requiring an income (rather than a small lump sum) and the insurance companies could write the asset in their books the same as if it were cash.

[Sheepshanks]

JulianPH said:

I had assumed (wrongly) that equity release would be akin to a 'property annuity' whereby you gave up your interest in the asset in return for a lifetime income.

That's called a Home Income Plan.

[Roger Irrelevant]

Ozzie Osmond said:

If I'd spent my life working hard to buy a house and plan for retirement I'd have no more enthusiasm for handing the cash to an "equity release! shyster than I do for handing it to the Treasury.

If people have got a decent house it's often massively more efficient to downsize and simply spend the "change". It rarely makes sense for oldsters to soldier on a family home that's now too big for them. I cannot stand equity release and would try to avoid it like the plague - however, I recognise that it can be an appropriate for some people.

With equity release the folks are still stuck in a corner once they've spent the equity released.

All valid points, and I agree that ER is totally unsuitable for a lot of people, but I'd make a few points in return.

- My parents freely admit that they didn't 'spend their life working hard to buy a house', they paid a pittance for it over thirty years ago, haven't worked particularly hard since (haven't shirked either mind), but have won the house price lottery in a major way.

- I agree that on paper downsizing almost always makes more financial sense. The trouble is this analysis ignores that a house is not just a financial asset but also a home, where (in my parents case), they have lived for decades, bought up 4 kids, become part of the local community and thus have no desire to move.

Anyhow, we seem to be in agreement really - ER is bad for a lot of people, but good for some. Trouble is that the latter category doesn't necessarily correlate with the people who actually take it out!

[boombastictiger]

Roger Irrelevant said:

" The trouble is this analysis ignores that a house is not just a financial asset but also a home, where (in my parents case), they have lived for decades, bought up 4 kids, become part of the local community and thus have no desire to move."

On this note so many people I have spoken to when buying a house on Mortgage go on about how it is such an incredible investment blah blah and how it will be worth so much in x many years but overlook that they are also living in it it and sometimes raising a family, which will incur additional costs that could potentially add to the debt (Extensions, decorate, furniture etc). Also I think that a lot of people forget the investment does not pay off until they sell the house and make a profit.

Maybe to many the ER option releases a chunk of this money/profit and allows them to enjoy some of the payoff from the investment?

Edited by boombastictiger on Wednesday 27th July 17:46

[JulianPH]

Sheepshanks said:

JulianPH said:

I had assumed (wrongly) that equity release would be akin to a 'property annuity' whereby you gave up your interest in the asset in return for a lifetime income.

That's called a Home Income Plan.

Hooray!!! Something like that does exist! I was going to say it sounds better than equity release, but I'll read up about it first this time