Equity Release Burden on ageing couple

Hi Chris,

In 2007 Equity release loans on your main residence were still highly regulated involving a full fact find and reasons why letter along with recommendations for legal advice.

Also it is/was my understanding that the regulated and qualified sales person would normally involve children in the conversation so that they understood the implications.

Is it possible they don't remember this or could it be a mis-sold product?

I dont know much about equity release other than the fact it is a bad idea because of the high compounded interest added to the original amount released. I would think the only way out of this arrangement is to sell the property. Gifting a property will attract tax - 20% iht on gifting and then the gifter would have to survive 7 years to avoid a further tax bill on their estate. When gifting, if the owner remains in the property, this is classed as a gift with reservation - not great from a tax perspective. Good luck.

Regarding the absence of paper work, they could ask the equity release company for a copy or the solicitor who did the conveyancing. They should have been advised to get independent advice which they probably waived, do you know for what purpose they took this step?

As to snowballing that is the way these work, your friend could enquire as to how much a month they would have to pay to (a) maintain the capital owed at its current level or (b) to reduce it.

I think they would insist on redemption if the house was signed over so the family would have to buy it from the parents. If they can do that then they would have to pay (or later pay IHT on) the market value or proceeds. If that is an issue probably best leave as is, as the loan will be deducted.

How long ago was this loan taken out?

I don't know if it's necessary for children to be consulted - after all they have no claim until the parents die and the parents are entitled to do as they wish with their property. Whether it was the best thing for them is another issue.

Many equity release / lifetime mortgages were (and are) offered with the choice to either not pay any interest payments per month (added interest to the loan instead) or to pay as a 'normal' mortgage - however the purpose is to help release money from the bricks and mortar, enjoy retirement and not pay any monthly payments during the term.

The lender wants interest on their money of course, so the choice above is offered, and most people take the 'add to the loan' option. Nothing scandalous in my opinion as it gives the borrower an enhanced income (and lifestyle) for no reduction in cashflow.

Yes, children are always involved - unless they don't want to be. These type of mortgage arrangement carry a 'morality issue' too as the children may perceive they are being deprived of an inheritance as the increasing mortgage balance eats in to what they think they will receive upon their parents death. Add to this the requirement for a solicitor to also be involved (again, unless the borrower refuses this as well) and the lenders (and Advisers) are indeed offering as much upfront (pre-app) support as possible.

The lender will of course have copies of all sales documentation should the borrowers need to obtain them for their records.

On to how best to transfer the property and how to minimise tax - for this I would suggest that the family speaks to a tax adviser / accountant and also a property lawyer / conveyancer. Between them they will provide personalised specific advice to best suit their financial circumstances.

And of course if the family then needs a mortgage, my team would be happy to assist too.

Hope that helps.

Hi Chris

From what you have said it would appear that the homeowners almost certainly arranged their equity release 'directly' and without any face-to-face meeting. This being the case they received 'information' but NO ADVICE whatsoever and as such have no redress against the company involved.
ER specialists like myself would like to see 'direct' and distant ER applications made illegal and all ER applications to be face-to-face and fully advised only. And no children are not always involved but every effort should be made to convince the homeowners to do so.

One possible way to rid themselves of the increasing debt is to consider switching to a home reversion plan. Whether it will stack up economically will depend on the figures. The other way out is downsizing and paying off the debt.

They cannot sign the property over to their family without having to pay off the loan as the ER lender will take this as being the end of the contract.

Sorry to be all doom and gloom.

Garry

http://www.ageuk.org.uk/products/financial-products-and-services/equity-release/

The code of conduct is given here. It says the implications for their estate must be discussed with the clients - no mention of including children. Of course it is just a summary.

I would say that you can make a will without discussing it with any family or beneficiary so why would this be different? Also there is no certainty (in England, although not Scotland) that children would be the beneficiaries, so why should they be consulted?

I carry out a number of regular (usually biennial) re-valuations of properties which are subject to equity release arrangements of various types. I won't comment on the advisability of taking money in this way but most of the elderly people I meet wish they had never done it.

Specifically I know of several who have not told their children of the arrangement despite being advised to by the provider. They are not however required to do so and I guess data protection rules apply. In the cases I know of the relationship between parent and child(ren) is strained.