Equity release….DIY version?
Discussion
Weird title, eh…
Has anyone ever helped a relative (parent, older sibling perhaps) by giving them a lump sum in exchange for adjusting their property to be Tenants in Common, to take a proportional share in the property?
Essentially to help them, and have a long-term investment (that I appreciate would be impossible to realise unless/until they pass away).
I assume that is kind of how equity release might work (but with the equity loan company taking that share).
Not looked into them enough to know what their loan deals might be, but have a situation where we could potentially help a relative in this way.
Not huge amounts (think tens of thousands, not hundreds!), but they could do with some help, and will never (barring lottery wins!) be in a position to repay the sum if it were simply loaned to them.
I am sure there are plenty of potential pitfalls to be wary of:
What if scenarios: eg, what if the person wants to move later in life? (unlikely at their age, but possible - I assume they just have their % of the funds if sold)
What if they end up going into care? (I’m guessing their % again could be sold to pay for them - we are not talking ‘deprivation of assets, btw - they are healthy)
Welcome any thoughts!
Has anyone ever helped a relative (parent, older sibling perhaps) by giving them a lump sum in exchange for adjusting their property to be Tenants in Common, to take a proportional share in the property?
Essentially to help them, and have a long-term investment (that I appreciate would be impossible to realise unless/until they pass away).
I assume that is kind of how equity release might work (but with the equity loan company taking that share).
Not looked into them enough to know what their loan deals might be, but have a situation where we could potentially help a relative in this way.
Not huge amounts (think tens of thousands, not hundreds!), but they could do with some help, and will never (barring lottery wins!) be in a position to repay the sum if it were simply loaned to them.
I am sure there are plenty of potential pitfalls to be wary of:
What if scenarios: eg, what if the person wants to move later in life? (unlikely at their age, but possible - I assume they just have their % of the funds if sold)
What if they end up going into care? (I’m guessing their % again could be sold to pay for them - we are not talking ‘deprivation of assets, btw - they are healthy)
Welcome any thoughts!
I have looked at this for a relative, though never went through with it.
The gist of equity release is a loan secured against the property, repayable on death. The loan rates they seem to use (after having back solved a few quotes) seem to be in the 5-6% range and depending on the age of the people involved you find the maximum amount that can be released is quite low if they're fairly young.
Anyway, things to consider:
You would need to register a legal charge against the property, not difficult but will cost a bit in legals.
You'll want a proper loan agreement put in place, again a few more £ for the lawyers
Need to "do the maths" to make sure you get the numbers right.
If the property is their only asset very likely that on death there will be no equity left for other beneficiaries.
What you receive at the end on repayment is largely interest income so consider the tax implications and how you will make the loan from day 1
I'm sure there's more but those were the key points when I looked at it.
The gist of equity release is a loan secured against the property, repayable on death. The loan rates they seem to use (after having back solved a few quotes) seem to be in the 5-6% range and depending on the age of the people involved you find the maximum amount that can be released is quite low if they're fairly young.
Anyway, things to consider:
You would need to register a legal charge against the property, not difficult but will cost a bit in legals.
You'll want a proper loan agreement put in place, again a few more £ for the lawyers
Need to "do the maths" to make sure you get the numbers right.
If the property is their only asset very likely that on death there will be no equity left for other beneficiaries.
What you receive at the end on repayment is largely interest income so consider the tax implications and how you will make the loan from day 1
I'm sure there's more but those were the key points when I looked at it.
I am not an expert - but the two scenarios outlined above seem quite different.
There is a huge difference between you buying a portion of the house, and you providing a loan that is secured on the property.
The second is probably the more straightforward as you remain at arms length with proper legal agreements to protect you, and of course relies on the charging of interest on the capital loaned which as said does raise the spectre of the property sale not realising enough capital to repay the loan with interest.
The former, which seems to be what the OP is thinking of, seems more complex in terms of potential liabilities and hassle down the line (who pays for routine maintenance? What if it needs a new roof, do you go halves? What happens if you got divorced and the courts ruled you had to give half of your half of the house to your ex?). How long, realistically, do they have to live? A lot can happen in 10 or 20 years.
Not at all saying it's impossible. But do be careful as it's probably more complicated and with more potential pitfalls than you think.
There is a huge difference between you buying a portion of the house, and you providing a loan that is secured on the property.
The second is probably the more straightforward as you remain at arms length with proper legal agreements to protect you, and of course relies on the charging of interest on the capital loaned which as said does raise the spectre of the property sale not realising enough capital to repay the loan with interest.
The former, which seems to be what the OP is thinking of, seems more complex in terms of potential liabilities and hassle down the line (who pays for routine maintenance? What if it needs a new roof, do you go halves? What happens if you got divorced and the courts ruled you had to give half of your half of the house to your ex?). How long, realistically, do they have to live? A lot can happen in 10 or 20 years.
Not at all saying it's impossible. But do be careful as it's probably more complicated and with more potential pitfalls than you think.
mikeiow said:
Weird title, eh…
Has anyone ever helped a relative (parent, older sibling perhaps) by giving them a lump sum in exchange for adjusting their property to be Tenants in Common, to take a proportional share in the property?
Essentially to help them, and have a long-term investment (that I appreciate would be impossible to realise unless/until they pass away).
I can echo the sentiments above, this is an interesting post.Has anyone ever helped a relative (parent, older sibling perhaps) by giving them a lump sum in exchange for adjusting their property to be Tenants in Common, to take a proportional share in the property?
Essentially to help them, and have a long-term investment (that I appreciate would be impossible to realise unless/until they pass away).
What is the perceived problem with commercial equity release that you feel a private agreement circumvents, Mike?
I have done it
We lent my other half parent's money. The key factors were
1) We insisted they take legal advice from a solicitor unconnected with us
2) We confirmed that we would never seek possession of the property whilst either of them was alive and if they fell into arrears, the arrears to accumulate with interest . The benefit of this undertaking did not carry over to a new spouse
3) The interest rate was less than what was available at that time on the market and was fixed throughout. At that time lifetime mortgages where interest can be rolled up was around 6%, and we lent it at 4.5%
4) The term of the loan was for life and the loan could be repaid at any time, no penalty
5) I got them each to write a letter (in their case handwritten ) to us explaining in their owns words what they thought the deal was all about after having taken legal advice -
6) The loan was registered as a first charge and consent from us would be required if they wanted to take on any further secured charges
It is almost an arms length transaction, and they do not feel they owe us any favours and that I believe is a healthy way to do transaction with family members
We lent my other half parent's money. The key factors were
1) We insisted they take legal advice from a solicitor unconnected with us
2) We confirmed that we would never seek possession of the property whilst either of them was alive and if they fell into arrears, the arrears to accumulate with interest . The benefit of this undertaking did not carry over to a new spouse
3) The interest rate was less than what was available at that time on the market and was fixed throughout. At that time lifetime mortgages where interest can be rolled up was around 6%, and we lent it at 4.5%
4) The term of the loan was for life and the loan could be repaid at any time, no penalty
5) I got them each to write a letter (in their case handwritten ) to us explaining in their owns words what they thought the deal was all about after having taken legal advice -
6) The loan was registered as a first charge and consent from us would be required if they wanted to take on any further secured charges
It is almost an arms length transaction, and they do not feel they owe us any favours and that I believe is a healthy way to do transaction with family members
deckster makes some good points and I was answering the question I wanted to rather than the one asked!
I also looked at purchasing the property but that has a number of different pitfalls.
1. what's the value? A property with a lifelong tenant paying no rent is much less than the same property with vacant possession. How will any potential beneficiaries feel about you doing this transaction?
2. How do you deal with maintenance? It's in your interest to maintain but the occupier will want to treat it as their house (understandably) so lots of potential arguments on what is required/how to do it
3. Is it a property that you even want to have ownership of?
In short, I concluded it was too much hassle and likely to lead to breakdown in relationships so left it well alone. I can always gift some money if it is necessary at some point in the future.
I also looked at purchasing the property but that has a number of different pitfalls.
1. what's the value? A property with a lifelong tenant paying no rent is much less than the same property with vacant possession. How will any potential beneficiaries feel about you doing this transaction?
2. How do you deal with maintenance? It's in your interest to maintain but the occupier will want to treat it as their house (understandably) so lots of potential arguments on what is required/how to do it
3. Is it a property that you even want to have ownership of?
In short, I concluded it was too much hassle and likely to lead to breakdown in relationships so left it well alone. I can always gift some money if it is necessary at some point in the future.
Just some thoughts off the top of my head, and for clarity I am a Mortgage & Equity Release adviser - happy to discuss the traditional ER options with you if needed...
If your property is mortgaged, when you come to move/remortgage etc, your share in your parents property could count against you on a future mortgage application. Lenders would want to factor in a percentage of the running costs of the property even though you don't contribute to them (I assume) which may negatively impact your borrowing power.
Tax implications for both of you need considering.
Future divorce case, or bankruptcy or something for you - this property will be factored in because you own a share.
Family and money don't often mix...that's not a particular point I'm trying to make, just a passing comment!
Sorry I really am just thinking out loud and typing...!
And just to clarify, although someone else has stated rates of 5-6% on normal ER, the lowest rate on the market today is about 2.5% and yes there are 5-6% rates but these are extreme examples. Happy to discuss of course.
If your property is mortgaged, when you come to move/remortgage etc, your share in your parents property could count against you on a future mortgage application. Lenders would want to factor in a percentage of the running costs of the property even though you don't contribute to them (I assume) which may negatively impact your borrowing power.
Tax implications for both of you need considering.
Future divorce case, or bankruptcy or something for you - this property will be factored in because you own a share.
Family and money don't often mix...that's not a particular point I'm trying to make, just a passing comment!
Sorry I really am just thinking out loud and typing...!
And just to clarify, although someone else has stated rates of 5-6% on normal ER, the lowest rate on the market today is about 2.5% and yes there are 5-6% rates but these are extreme examples. Happy to discuss of course.
RowanF said:
And just to clarify, although someone else has stated rates of 5-6% on normal ER, the lowest rate on the market today is about 2.5% and yes there are 5-6% rates but these are extreme examples. Happy to discuss of course.
When we did the deal, 6% was the rate but as you say with the collapse in interest rates in the last few years rates of 2.5% can be obtained as of course you knowSounds like a great idea to me. Private equity release is popular in France under the viager system but usually with complete strangers. That has a pitfall when the house owner dies early and their would be beneficiaries find out that you, not they, own the property. The system is tipped to become more widespread in the UK but I would have thought that keeping it in the family can only be beneficial if everyone is on the same page.
deckster said:
What happens if you got divorced and the courts ruled you had to give half of your half of the house to your ex?). How long, realistically, do they have to live? A lot can happen in 10 or 20 years.
Father-in-law did equity release without his two sons or us knowing about it. I don't know how the deal worked but in round figures it was £400K property and he seemed to give up half its value for £100K.A few years later MIL died unexectedly. He didn't want to stay in the house as it had a big garden that was very much her thing. But coming out of with £200K left him short to buy a replacement so we all ended up chipping in!
His new house was split 4 ways between us and he fairly recently died and it all worked out OK. I don't know what would have happned if he'd remarried or gone into care.
A lot of great replies - thank you all!
It might be that an ER thing could work well for them, & might be the best thing.
The relative (my sibling!) has relatively low income. We have 'loaned' money (& a car at one point!) in the past, which I knew was unlikely to get repaid.
BUT: there are some bigger issues looming.
Boiler needs replacing (£2.5-3k), windows are pretty knackered (could be IRO £3-4k), car is knackered (£10k+), kitchen needs ripping out & replacing (£2-3k for hardware - we might be able to help fit).
It starts to add up, & they find it a struggle to figure out a way forwards with no major savings. Looking for things to help with a discussion in the near future.
Relative approaching retirement age (with reasonable but not wealthy pension provision - we have had finance discussions in the past). They are considering raiding the pension money for some of this - to my mind, that is dangerous, given they don't have a huge pension pot.
We could help with the immediate issue (boiler!), but aren't really in a position to be funding all the things coming up.
It struck me that we could potentially 'invest' in the place, hence the idea of having part ownership.
They are single, unlikely (but not impossible, of course) to change that. No dependants to inherit in the future (important!).
It felt like a way to get a decent sum for them to *invest* for their future as well as pay for immediate things now, and to ultimately become something that could potentially come to ours later as part of their inheritance (eg, keeping the monies in the family!).
Could we just 'loan' the money (with little chance of payback)? Some....but not to the point I would remove our funds as a source of future inheritance to our offspring!
Plenty to think about here - thanks again for the ideas, I know this will not be straightforward.
horselesscarriage said:
I can echo the sentiments above, this is an interesting post.
What is the perceived problem with commercial equity release that you feel a private agreement circumvents, Mike?
It wasn't that we saw a problem - this is us pre-empting things with a random idea ;-)What is the perceived problem with commercial equity release that you feel a private agreement circumvents, Mike?
It might be that an ER thing could work well for them, & might be the best thing.
The relative (my sibling!) has relatively low income. We have 'loaned' money (& a car at one point!) in the past, which I knew was unlikely to get repaid.
BUT: there are some bigger issues looming.
Boiler needs replacing (£2.5-3k), windows are pretty knackered (could be IRO £3-4k), car is knackered (£10k+), kitchen needs ripping out & replacing (£2-3k for hardware - we might be able to help fit).
It starts to add up, & they find it a struggle to figure out a way forwards with no major savings. Looking for things to help with a discussion in the near future.
Relative approaching retirement age (with reasonable but not wealthy pension provision - we have had finance discussions in the past). They are considering raiding the pension money for some of this - to my mind, that is dangerous, given they don't have a huge pension pot.
We could help with the immediate issue (boiler!), but aren't really in a position to be funding all the things coming up.
It struck me that we could potentially 'invest' in the place, hence the idea of having part ownership.
They are single, unlikely (but not impossible, of course) to change that. No dependants to inherit in the future (important!).
It felt like a way to get a decent sum for them to *invest* for their future as well as pay for immediate things now, and to ultimately become something that could potentially come to ours later as part of their inheritance (eg, keeping the monies in the family!).
Could we just 'loan' the money (with little chance of payback)? Some....but not to the point I would remove our funds as a source of future inheritance to our offspring!
Plenty to think about here - thanks again for the ideas, I know this will not be straightforward.
Edited by mikeiow on Friday 17th September 12:58
Numpty with honours said:
I have done it
We lent my other half parent's money. The key factors were
1) We insisted they take legal advice from a solicitor unconnected with us
2) We confirmed that we would never seek possession of the property whilst either of them was alive and if they fell into arrears, the arrears to accumulate with interest . The benefit of this undertaking did not carry over to a new spouse
3) The interest rate was less than what was available at that time on the market and was fixed throughout. At that time lifetime mortgages where interest can be rolled up was around 6%, and we lent it at 4.5%
4) The term of the loan was for life and the loan could be repaid at any time, no penalty
5) I got them each to write a letter (in their case handwritten ) to us explaining in their owns words what they thought the deal was all about after having taken legal advice -
6) The loan was registered as a first charge and consent from us would be required if they wanted to take on any further secured charges
It is almost an arms length transaction, and they do not feel they owe us any favours and that I believe is a healthy way to do transaction with family members
So this was a loan that they repay whilst living: not something tied to a repayment after their deaths?We lent my other half parent's money. The key factors were
1) We insisted they take legal advice from a solicitor unconnected with us
2) We confirmed that we would never seek possession of the property whilst either of them was alive and if they fell into arrears, the arrears to accumulate with interest . The benefit of this undertaking did not carry over to a new spouse
3) The interest rate was less than what was available at that time on the market and was fixed throughout. At that time lifetime mortgages where interest can be rolled up was around 6%, and we lent it at 4.5%
4) The term of the loan was for life and the loan could be repaid at any time, no penalty
5) I got them each to write a letter (in their case handwritten ) to us explaining in their owns words what they thought the deal was all about after having taken legal advice -
6) The loan was registered as a first charge and consent from us would be required if they wanted to take on any further secured charges
It is almost an arms length transaction, and they do not feel they owe us any favours and that I believe is a healthy way to do transaction with family members
Not somehow tied to a proportional ownership of the house after their passing.
The latter was sort of what we were thinking about, rather than 'just' a loan.
It is a complex topic, for sure!
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