Taking out equity release may seem risky but there are solid regulations and robust safeguards supporting these products. Mark Gregory explains more in his latest reader Q&A
The Question
My mother is taking out equity release to help us pay off some family debts. We are very touched she wants to help us financially, but we are also worried about the credibility of equity release. I understand it has become more of a mainstream product, but a quick Google has not put my mind at rest.
I am specifically concerned about who will own my mother’s home if she took out an equity release plan, how much interest she would have to pay and what would happen to the home and the money from the sale when she dies.
Mark’s Answer
Hello, and thanks for your enquiry. I agree that it is very thoughtful of your mother to want to help you and I also 100% agree that you want to ensure that she is not putting herself at financial risk or harm by doing so.
The good news is, you’re not wrong in saying equity release has become much more mainstream – over the last 25 years, equity release has evolved and become flexible with so many features and benefits that could be suitable for your mother’s circumstances.
We always encourage our customers to allow family members or friends to attend any meeting with our friendly expert advisers to offer support and guidance. However, this can only be achieved with the permission of the customer.
I can confirm that if your mother is over 55 and her home is worth more than £70,000, she may be eligible for a flexible Lifetime mortgage which is by far the most common type of equity release. For example, your mother may be able to raise a cash lump sum secured against the equity in her home.
She would retain 100% ownership of her home, and the cash lump sum would only be payable when she leaves her home – either when she has passed away or needs long-term care. Any remaining equity goes to her estate – which means to you and any other beneficiaries.
The other safety net provided is that any plan taken out by a lender who is a member of the Equity Release Council (which we always recommend), will include a No Negative Equity Guarantee. This means neither she nor the family will ever owe more than the value of the home – even if property prices fall.
Now regarding the interest. if your mother doesn’t make any repayments, the interest is added to the loan each year – and yes, this means it compounds. That’s often where concerns arise.
But all lifetime mortgage plans now allow her to make voluntary repayments if she wants to. This can be between 10% to 12%% of the original loan amount borrowed that can be repaid each year, completely penalty-free. This can significantly reduce how much is owed over time.
I therefore suggest one of our expert advisers should assess her circumstances, and provide her with clear, transparent information and guidance and then make a recommendation. They will show her all the short-term and long-term costs and then during the application process she will discuss her plans with her own independent solicitor. Assuming, your mother continues with the application, her home would be valued and the equity release lender would make a formal offer of loan.
If your mother accepted the advice, she would receive a cash lump sum with a fixed rate of interest. She would then decide if she or you as a family want to make payments to service the interest. The payments can be for all, or part of the interest and an adviser would fully explain and demonstrate the benefit of making partial and full payments. The risk with this plan is that if your mother does not make payments, the interest will be added to the loan and will increase and reduce her estate.
Furthermore, it is important to understand if the gift will impact any means tested benefits she has or maybe entitled to, and your adviser will be help and guide you. So, my advice is to contact one of our friendly, expert advisers who will help and guide you as a family. Because as noted, it is a big decision for all of you, and you will all be reassured once you have been guided by a professional adviser.
Meet our expert…
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience.
He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists.
Email kate.saines@emap.com to ask Mark a question
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