[Finance] Equity release

[dazzer6666]

Pretty sure this can’t happen. When the remaining spouse dies there can be no negative equity. The value of the property pays the debt and if it’s insufficient the lender takes the hit.

It’s also compulsory to take professional advice.

The equity release lenders also don’t lend high amounts in relation to the property value so they limit their risk of taking a hit……

 

[kevo]

I don't understand that. You take out say £100k from the value of the property as an equity release, and then you die. Your beneficiaries have the value of the house - the £100k equity release and some fees, and the £100k in the bank.

Was going to post the same - didn't make sense to me either.

 

[Neville's Breakfast]

I don't understand that. You take out say £100k from the value of the property as an equity release, and then you die. Your beneficiaries have the value of the house - the £100k equity release and some fees, and the £100k in the bank.

Because the equity release company take equity in the house. It’s not the same as a mortgage. As far as I know there weren’t any monthly payments. He was ill and had no income apart from pension. How could there be ? They simply gave him some cash and took a large stake in his house. If we had known what he was doing we would have dissuaded him.

 

[dazzer6666]

I don't understand that. You take out say £100k from the value of the property as an equity release, and then you die. Your beneficiaries have the value of the house - the £100k equity release and some fees, and the £100k in the bank.

What about the compound interest that has been added to the 100k since drawdown? This is where the ‘rip off’ element comes in….relatively high interest rates and compounding means the remaining equity can be quickly eaten up (hence the LTVs being less)

 

[kevo]

Because the equity release company take equity in the house. It’s not the same as a mortgage.

Still doesn't make sense to me.

Say if you had a house worth £300k and you took equity release on a third, they would give your £100k capital.

If you died the next day, the property would be sold and they would get 1/3 and your family 2/3 of the value of the property. So they'd get £100k, and your surviving family £200k.

But your family would also inherit the £100k capital.

 

[timbha]

Still doesn't make sense to me.

Say if you had a house worth £300k and you took equity release on a third, they would give your £100k capital.

If you died the next day, the property would be sold and they would get 1/3 and your family 2/3 of the value of the property. So they'd get £100k, and your surviving family £200k.

But your family would also inherit the £100k capital.

That’s how I see it

 

[timbha]

The negative equity lenders also don’t lend high amounts in relation to the property value so they limit their risk of taking a hit……

Freudian slip there??

 

[dazzer6666]

Still doesn't make sense to me.

Say if you had a house worth £300k and you took equity release on a third, they would give your £100k capital.

If you died the next day, the property would be sold and they would get 1/3 and your family 2/3 of the value of the property. So they'd get £100k, and your surviving family £200k.

But your family would also inherit the £100k capital.

Depends on whether it’s a ‘lifetime mortgage’ or a ‘home reversion’ equity release

With a lifetime mortgage the lender lends you a sum (100k in your example) and charges you interest on that 100k from day 1, and (usually - not so common for people to pay the interest) adds that to the loan. The 100k pretty quickly becomes a lot more than 100k

With a reversion, you essentially sell the house (or a % of the house) to the lender and retain the right to live in it. They’ll offer significantly less than the market value.

 

[dazzer6666]

Haha, yes

 

[Denis]

My father in law did equity release. He lived well into his nighties. By the time he died, there was so much interest accrued, that once the house was sold, the original loan repaid, there was hardly any money left for his family. I wouldn’t touch equity release.

 

[Weststander]

Because the equity release company take equity in the house. It’s not the same as a mortgage. As far as I know there weren’t any monthly payments. He was ill and had no income apart from pension. How could there be ? They simply gave him some cash and took a large stake in his house. If we had known what he was doing we would have dissuaded him.

Was this a few years back?

There were to-all-intents crooks (but big names) running equity release schemes, thankfully I think they were all squeezed out with a regulatory clampdown.

 

[dazzer6666]

My father in law did equity release. He lived well into his nighties. By the time he died, there was so much interest accrued, that once the house was sold, the original loan repaid, there was hardly any money left for his family. I wouldn’t touch equity release.

Precisely….the compounding effect is quite dramatic. As an example, with ER rates around 4%, this would add 50% to the original debt in 10 years.

 

[Uncle Spielberg]

Consider a RIO mortgage. lenders can lend to age 99 on interest only

 

[Live by the sea]

By and large it's a really poor way to release some cash and could cost you far more than you envisage in the long term.

If it's possible the best way of releasing some capital would be to downsize and move to a smaller property and realise some extra capital that way.

The only winners with Equity release are the companies involved in pushing such schemes. Beware.

Agree - avoid equity release schemes at all costs and be wary of any firm trying to promote them . It’s a scheme aimed at cash poor people and it is a rip off .

 

[Uncle Spielberg]

Was this a few years back?

There were to-all-intents crooks (but big names) running equity release schemes, thankfully I think they were all squeezed out with a regulatory clampdown.

Weststander is right. These products have changed hugely and may be suitable for some people

 

[HalfaSeatOn]

Don’t see the problem with equity release for certain circumstances. You only live once. As a rule of thumb, read a few articles, looks like the loan cost doubles every 15 years. So a £100k loan taken out when your 60 costs £300k when your 90. Not a big deal if your property is in wealthy south east as probably when your 90 it’ll be a well established multi million pound property. Leaves plenty for the kids to be grateful to dad on a future Fathers Day weekend.

 

[Peacehaven Wild Kids]

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Thanks for all the replies, I assumed there were a lot of ‘cons’. To be honest looking at my personal circumstances and reading replies it may not be for me. Thanks for your time

PS when are the fixtures out?

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[Deleted member 37369]

Because the equity release company take equity in the house. It’s not the same as a mortgage. As far as I know there weren’t any monthly payments. He was ill and had no income apart from pension. How could there be ? They simply gave him some cash and took a large stake in his house. If we had known what he was doing we would have dissuaded him.

Sounds like it could be a Home Reversion scheme where you sell all or part of the property at a discount to the company/bank. They will always then own that percentage of the value of the house ... so as well as the initial discount they also benefit when house prices increase.

I remember Bank of Scotland doing these many many years ago and coming in for a lot of stick about them!

 

[timbha]

Don’t see the problem with equity release for certain circumstances. You only live once. As a rule of thumb, read a few articles, looks like the loan cost doubles every 15 years. So a £100k loan taken out when your 60 costs £300k when your 90. Not a big deal if your property is in wealthy south east as probably when your 90 it’ll be a well established multi million pound property. Leaves plenty for the kids to be grateful to dad on a future Fathers Day weekend.

Precisely. In certain circumstances. Ie IF property prices rise BUT there are also dips in property prices and 2008, for example wouldn’t have been a good year to die!

Imagine if you had one child and they lived at home. When you die they will have to stump up the value of the loan plus interest (plus other costs) to be able to remain in the property.

It’s worth exploring other options to release, borrow or steal £100k which is why you must see a professional IFA (for the first two, and perhaps the 3rd!)

 

[drew]

I think there is a £3000 annual limit on gifts, before something kicks in. Can't remember what though.

Also if they have to go into social care it could be regarded as a deliberate deprivation of assets.

Pretty certain there is no limit however if the person giving the gift dies within 7 years then that gift becomes part of the IHT calculation and could be subject to the 40% tax. However, I think the £3k limit is an annual exemption.

So, if you give away £3000 the year before you die it won't count towards your estate and the IHT calculation. If you give away £100k the year before you die then £97k will form part of your estate. However if you give away £100k and live for a further 7 years then none of it is taxed under the IHT.