The Question
I hope you can help with a question I have regarding my parents. I live in Australia and my parents live in the UK, so I don’t see them very often.
I am due to visit soon and when making arrangements my mum told me she had taken out equity release on the family home. She said she was using the loan to make up for a shortfall in pension.
Please could you explain what equity release is, whether it’s safe and how it might impact my future inheritance? Thank you.
Mark’s Answer
Thank you for your question and I hope you have a safe trip back to the UK and enjoy your time with your family. Firstly, to reassure you that equity release is regulated by the UK Financial Conduct Authority (FCA) and all providers are members of the Equity Release Council who set the standards for advice in the UK.
As your mum has taken an equity release product she must have originally taken financial advice and accepted a recommendation, as releasing equity is an advised and regulated process, and customers cannot secure a plan without taking advice.
Furthermore, one of the standards insisted by the Equity Release Council is that all customers must take independent legal advice before the application completes.
The equity release application process can take approximately eight weeks, so your mum would have had time to consider her plans, and I hope this feedback reassures you.
Equity release offers two main products. The majority of plans recommended are for the flexible Lifetime mortgage and approximately less than 1% of completed plans are for a home reversion plan.
I will provide a brief overview of each product and then if you require any further information, or your mum requires a review of her product, I suggest she contacts her adviser. Alternatively, your mum could consider a review with one of our specialist independent advisers who have access to the entire equity release market without any ties or restrictions.
Home reversion plan
A home reversion plan is where part, or all of the homeowners’ property is sold to the plan provider in exchange for a tax-free lump sum, or regular payments. A lifetime tenancy is then created, protecting the homeowners’ residency and freedom to live in their home rent-free for the rest of their life.
There is no interest charged, and the percentage sold remains fixed until the end of the home reversion plan term.
At that point, which is when the last homeowner has died or gone into permanent care, the house will be sold with proceeds being split in accordance with the percentages originally agreed with the lender.
Any money left will then be shared amongst the homeowner’s beneficiaries as an inheritance. This plan will impact on any future inheritance as the share, or all of the property, sold will not be available for any beneficiaries.
Lifetime mortgage
A Lifetime mortgage is a loan secured against the property until the homeowner either enters long-term care, or they pass away. The homeowner could repay the loan before these events though this may incur early repayment charges.
As noted, a homeowner must take financial and legal advice, and they receive a cash lump sum that they can spend on their objectives including to provide income for lifestyle purposes.
The plan may have the option of an initial lump sum and a cash reserve facility to drawdown further funds in the future, though this depends on the advice and how much the initial lump sum was for.
The homeowner is only borrowing the capital, so the provider adds interest to the loan with a fixed rate for life, and then the homeowner decides how to manage the interest.
One of the standards insisted by the Equity Release Council is that all providers of Lifetime mortgages must allow homeowners to service the interest, or they can let the interest roll-up without penalty.
Of course, if the homeowner elects to allow the interest to roll-up, this will compound as interest is added to the loan and future interest, if no payments are made.
This plan will impact on inheritance as the loan must be repaid with interest unless the homeowner has made interest and/or capital payments.
As this is a brief overview of both equity release options as noted, I suggest a review with a qualified financial adviser, and one of our experts will be more than happy to answer any further questions you have, though they could not provide you with specific details of your mums’ plan without her permission.
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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