Parents want to do an "equity release" thingie on their home
Discussion
The topic of my parents releasing some of the equity in their house came up when I was chatting with them today.
The way I understand it is they mortgage a percentage of their house (they own it outright by the way), looking like 25% and "pocket" the cash. Interest is then set at a fixed rate (7% at the product they are looking at) and over the years the interest payments are added to the amount owed to the bank.
When they eventually pop their clogs whatever the bank is owed (which could be 3 or 4 times the original amount if they live to a ripe old age) is taken from sale of the house up to but not exceeding the sale price of the house. So if property prices take a nose dive the bank loses out.
I may have gotten the wrong end of the stick about the way the product works though.
The plan is for them to use some of the money for retirement luxuries like travelling etc and to give some to the kids and grandchildren.
Whilst they are fortunate to have pensions that will provide them with a comfortable retirement the extra cash from this would make it very pleasant indeed.
On the face of it, it doesnt seem too bad a deal, the bank takes the risk of a property crash, and if property sky-rockets there could still be "spare" cash even after the sale of the property.
They get some retirement top up money, and they also get to enjoy seeing their family make use of their inheritance, because they arent dead!!
My Dad seemed convinced by it and although I'd told him it was a bonkers idea I couldnt really argue why other than "why pay the banks all that interest"!
Anyone know more about these products, are they are good idea?
Cheers
The way I understand it is they mortgage a percentage of their house (they own it outright by the way), looking like 25% and "pocket" the cash. Interest is then set at a fixed rate (7% at the product they are looking at) and over the years the interest payments are added to the amount owed to the bank.
When they eventually pop their clogs whatever the bank is owed (which could be 3 or 4 times the original amount if they live to a ripe old age) is taken from sale of the house up to but not exceeding the sale price of the house. So if property prices take a nose dive the bank loses out.
I may have gotten the wrong end of the stick about the way the product works though.
The plan is for them to use some of the money for retirement luxuries like travelling etc and to give some to the kids and grandchildren.
Whilst they are fortunate to have pensions that will provide them with a comfortable retirement the extra cash from this would make it very pleasant indeed.
On the face of it, it doesnt seem too bad a deal, the bank takes the risk of a property crash, and if property sky-rockets there could still be "spare" cash even after the sale of the property.
They get some retirement top up money, and they also get to enjoy seeing their family make use of their inheritance, because they arent dead!!
My Dad seemed convinced by it and although I'd told him it was a bonkers idea I couldnt really argue why other than "why pay the banks all that interest"!
Anyone know more about these products, are they are good idea?
Cheers
Speaking as a banker, they tend to be terrible products. The interest rate is very high, they often have big fees upfront (which are never paid off, they just roll up at the interest rate), and it can end up with a person losing their whole house over a loan for a small fraction of it.
I'm not saying that they should always be avoided, but please make sure that they shop around, and explore alternative routes to the money. For example, do you have any long-term savings? Offer them these, and you will be in effect earning 7% on them (you'll inherit the whole house, debt free, instead of the house minus the loan repayment amount).
If your parents decide that they want to downsize, what happens with this product? If they need to sell for nursing home costs, what then?
Just do your homework.
I'm not saying that they should always be avoided, but please make sure that they shop around, and explore alternative routes to the money. For example, do you have any long-term savings? Offer them these, and you will be in effect earning 7% on them (you'll inherit the whole house, debt free, instead of the house minus the loan repayment amount).
If your parents decide that they want to downsize, what happens with this product? If they need to sell for nursing home costs, what then?
Just do your homework.
Having been involved with a few of these arrangement, the best option by far (if you go this route at all) in my opinion is to go the extra monthly income route rather than taking the lump sum. It gives them the extra for the luxuries etc, just doesnt meet the objective of giving a lump sum to children/grandchildren. However, it is possible to do a combination where they have a smaller lump sum then a monthly income. Still a better bet than taking a bigger lump sum, especially as whilst they aren't spending the lump sum in one go, it's earning bugger all on deposit.
7% is an awfully high rate of interest.
Depending on what your siblings are like, and their financial situation, you'd be better of getting personal loans of the same amounts, giving the money to your parents, and leaving their estate intact.
Or possibly buying their house off them, for 25% of it's value, equally between the beneficiaries of the will.
Speak to a good financial advisor or accountant about avoidance of inheritance tax. It may well be a couple of hundred quid well spent. (I have no idea how the above suggestions affect this.)
Depending on what your siblings are like, and their financial situation, you'd be better of getting personal loans of the same amounts, giving the money to your parents, and leaving their estate intact.
Or possibly buying their house off them, for 25% of it's value, equally between the beneficiaries of the will.
Speak to a good financial advisor or accountant about avoidance of inheritance tax. It may well be a couple of hundred quid well spent. (I have no idea how the above suggestions affect this.)
These schemes rely on people getting excited about some money upfront and forgetting about the bigger picture, it's obviously not the best idea for the homeowners otherwise banks wouldn't be doing it. There was a case on TV recently where some lady had done a similar thing and sold 'some' of her house, but the fact that the finance co. were on the deeds meant that when they went under, she lost all the equity she had in the house and had to leave. Not cool.
The idea above somewhere that the childrent buy the house for 25% of the value is if possible a great idea.
The idea above somewhere that the childrent buy the house for 25% of the value is if possible a great idea.
dingg said:
terrible idea
sell the house and downsize if they need the dosh.
I know someone who signed up for something similar and they have lost their house - unbelieveable but true
I heard about this on R4 a while back. Basically the company that lends you the money borrows the money to lend you in the first place. sell the house and downsize if they need the dosh.
I know someone who signed up for something similar and they have lost their house - unbelieveable but true
Then if they go bust you lose your house.
Johnnytheboy said:
I heard about this on R4 a while back. Basically the company that lends you the money borrows the money to lend you in the first place.
Then if they go bust you lose your house.
Thats what happened to the person I know - the company went bust another company took over and she ended up loosing her house. If it smells too good to be true it usually is!!!! Then if they go bust you lose your house.
NO NO NO.
Avoid totally these products.
They are (in my personal opinion) extraordinarily complex and unethical and will be banned.
Many pensioners who take them on do so because they are in a desparate financial situation and are not, in any way, able to make an informed decision about the reality of what they are signing up for.
Almost impossible to alter, pay off, change or cancel if your circumstances change (which they will).
Also, BTW, 7% is compound interest so the debt snowballs out of control spectacularly within a few years.
Couple the sickening effect of opening the annual statement showing how much of your house is now not yours, with advancing age and possibly ill health and your parents could be in for a much less rosy future with this than without it.
If you and your sibs can't help financially, then your parents are best off downsizing or accepting a less comfy financial position in retirement.
Avoid totally these products.
They are (in my personal opinion) extraordinarily complex and unethical and will be banned.
Many pensioners who take them on do so because they are in a desparate financial situation and are not, in any way, able to make an informed decision about the reality of what they are signing up for.
Almost impossible to alter, pay off, change or cancel if your circumstances change (which they will).
Also, BTW, 7% is compound interest so the debt snowballs out of control spectacularly within a few years.
Couple the sickening effect of opening the annual statement showing how much of your house is now not yours, with advancing age and possibly ill health and your parents could be in for a much less rosy future with this than without it.
If you and your sibs can't help financially, then your parents are best off downsizing or accepting a less comfy financial position in retirement.
There are variations of these high commission packages.
All usually fall somewhere bewtween Annuities and reverse mortgages.
I consider them "the last resort", it really depends on the financial situation of your parents.
Maybe they need a few extra hundred per month?
Do they really need a lump sum?
Find out what their need is and approach it from there.
7%pa plus set up aint good.
All usually fall somewhere bewtween Annuities and reverse mortgages.
I consider them "the last resort", it really depends on the financial situation of your parents.
Maybe they need a few extra hundred per month?
Do they really need a lump sum?
Find out what their need is and approach it from there.
7%pa plus set up aint good.
Cool, some glowing reports on how good these schemes are then! 
I dont think downsizing is really on the cards for them at the moment, it's not a massive house anyway (3 bed semi, nice area so may be worth about £400,000 in todays market) They like having the grandkids to stay and and the luxury of an office.
They dont NEED the cash, but see it as an easy route to topping up the pension income, which by todays standards wont be too shabby.
Me and the brother buying part of the house would be a very nice idea but unlikely with my financial situation for the next couple of years and probably less so with my brother as he's got a large family to support and has just taken a large-ish mortgage so he can house them all comfortably!
If I had the dough I'd definitely do it as I grew up there and the olds have been there for 34 years.
I'll pass on the feedback from here, thanks again for the info, the prospect of a forced sale in the event of the bank/loan company going pop is not a good one.
Any more thoughts please do keep them coming.
I dont think downsizing is really on the cards for them at the moment, it's not a massive house anyway (3 bed semi, nice area so may be worth about £400,000 in todays market) They like having the grandkids to stay and and the luxury of an office.
They dont NEED the cash, but see it as an easy route to topping up the pension income, which by todays standards wont be too shabby.
Me and the brother buying part of the house would be a very nice idea but unlikely with my financial situation for the next couple of years and probably less so with my brother as he's got a large family to support and has just taken a large-ish mortgage so he can house them all comfortably!
If I had the dough I'd definitely do it as I grew up there and the olds have been there for 34 years.
I'll pass on the feedback from here, thanks again for the info, the prospect of a forced sale in the event of the bank/loan company going pop is not a good one.
Any more thoughts please do keep them coming.
davido140 said:
Cool, some glowing reports on how good these schemes are then!
There have been some profile issues with certain equity release schemes, but there are reputable firms that offer a variety of products to meet different requirements.I suggest a visit to www.ship-ltd.org which provides a lot of information about types of equity release products available and provides links to providers that have signed up to a voluntary code of conduct.
The advice you've been given above hasn't been provided by experts!
davido140 said:
I'll pass on the feedback from here, thanks again for the info, the prospect of a forced sale in the event of the bank/loan company going pop is not a good one.
Once they / you have read more about the products available from ship-ltd, they should speak to an independent financial advisor who will provide proper advice, not the potentially highly misleading information provided above.Sidicks
Edited by sidicks on Monday 3rd October 20:52
sidicks said:
Once they / you have read more about the products available from ship-ltd, they should speak to an independent financial advisor who will provide proper advice, not the potentially highly misleading information provided above.
Sidicks
Not just any IFA, one who is qualified to do Equity Release.Sidicks
Your Parents, and their heirs, would do well to take independent legal advice on any form of ER scheme.
There has been an ongoing grumbling in our part of the industry that when the FSA get bored of doing the banks for PPI misselling and then get through UCIS misselling, ER is on their list of things to look at.
davido140 said:
I dont think downsizing is really on the cards for them at the moment, it's not a massive house anyway (3 bed semi, nice area so may be worth about £400,000 in todays market) They like having the grandkids to stay and and the luxury of an office.
You say they won't downsize at the moment but it becomes increasingly difficult to move as the oustanding balance increase. You can move the loan too, but, when my in-laws needed to do this completely unexpectedly, the lender wanted the percentage equity to stay the same on the cheaper house so a significant amount of the money gained in downsizing had to be used to reduce the loan. In the end we (between 3 of us) bought the loan out, but it cost twice the amount he'd got just 2 years before.Don't they get a lump sum option from their pensions?
I agree with a person earlier.
Downgrade, then get a similar lump sum, but don't lose the house in the process. They will then also be wealthier by running a smaller home you would imagine.
Basically lose your entire home for the sake of 25% of it's value today?
Pay interest to attain it, then pay interest BACK again to have it taken off you. Net gain, 25% of the houses value.
So take a £100,000 house, total repayment over 25yrs ~ £175,000
Then take £25,000 back (25% of value), in return for probably losing the entire home by the end of your retirement.
So total gain is £25,000, in return for £175,000 of payments through your life. Hmmmmm...
Seems to me you are better downgrading to the tune of 25% release, and then have a house to pass down to your next generation, or the one below that, or whatever else...
Dave
I agree with a person earlier.
Downgrade, then get a similar lump sum, but don't lose the house in the process. They will then also be wealthier by running a smaller home you would imagine.
Basically lose your entire home for the sake of 25% of it's value today?
Pay interest to attain it, then pay interest BACK again to have it taken off you. Net gain, 25% of the houses value.
So take a £100,000 house, total repayment over 25yrs ~ £175,000
Then take £25,000 back (25% of value), in return for probably losing the entire home by the end of your retirement.
So total gain is £25,000, in return for £175,000 of payments through your life. Hmmmmm...
Seems to me you are better downgrading to the tune of 25% release, and then have a house to pass down to your next generation, or the one below that, or whatever else...
Dave
Mr Whippy said:
Seems to me you are better downgrading to the tune of 25% release, and then have a house to pass down to your next generation, or the one below that, or whatever else...
Bear in mind that not everyone wants to leave property in their will - in my dealings with old people some are terrified of the hassle they imagine might occur after they die, and who would they burden with dealing with their estate.So taking some money out of the house, and the house ending up being close to worthless when they die, can look like killing two birds with one stone.
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