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After having to move from my latest property after 18months with no notice, I was looking at places to rent.

£800 for a studio felt like loads going down the drain and I mentioned as much to the rents.

They have somehow got the bit between their teeth and have spoken to their accountant about this equity release. I personally wouldn't be able to get much of a mortgage.

Their idea is to get £300k (ish) against their house and invest in a property for me. I would make a monthly payment, hopefully directly against the interest, and any interest in theory that is accruing above my "rent" payments are subject to compound interest.

When they both die then the value of the debt is taken from their house being sold (likely worth £1m or so atm).

Is this a good idea? What are the pitfalls? Would it avoid inheritance tax?

They wouldn't feel any effects in theory as you don't have to pay any of the interest and they can't chase the debt until they both die. But I do have 2 siblings (who both own homes and families) so it should be fair on them (if the interest makes the debt large then it could possibly be more than 1/3rd the estate, I guess. I don't know what cash they have in the bank (and don't want to. Told them to spend it all!)

Would there be an advantage in borrowing less and getting a mortgage for say £100k which is I think possible?

I've asked to talk to their accountant who apparently thinks it is a good idea, as do my siblings, in theory... Something isn't sitting right with me, however.

Im pretty sure they cannot just give you £300k and buy a house in your name although i could be wrong. There are certain ways like in trust i believe they can but if they pass in a certain amount of time you will still pay IHT (Inheritance Tax) To me the best way of doing this is surely to "borrow" as much as you need for a deposit then get your own mortgage.

Or if you cannot get a mortgage then them to buy the house and you to pay a "rent" of the interest on the money seems fair.

Then if when it comes to them passing, they have say £900k and you have two brothers you would only get £700k tax free so would have to pay IHT on the £200k left over. If it was easy numbers it would be ideal if you and your brother all got £300k (in your case if the house you live in is worth £300k then you would get that and not cash) each when they pass and you each pay your share of the IHT (you can insure against IHT if needed). The worst case would be if you all split your house when they passed and if your brothers/sisters have wives etc then it gets really messy!

IHT tax free money is moving to £500k each parent over the next few years so if your parents net worth is circa a million you wont pay tax on this after 2020~ i think.

If entering into an agreement where they buy you a house i would make sure their will is rock solid and all benificators from the will are happy with the situation. It is not a nice thing to deal with after parents pass if your parents wishes are not known before they pass. Its hard to talk about but makes things a lot easier in the long term.

If they show they have the income to make payments I doubt they will care too much if its to help out a son. If they can't then it's a different issue.....

I'm not quite sure what is being proposed.  Equity release for retired people usually means a loan taken against the value of a house where the interest is not paid and compounds until the last death.  This means that the loan repaid on the last death of a couple is very large.  You seem to describe some sort of re-mortgage, where you would pay the interest.  I haven't worked in finance for a while, so there might now be available flexible arrangements that allow interest payments to be made.

Re inheritance tax, once again I'm a bit rusty, but the main issue is that if you pay regular interest, the money given to you might be viewed as a "gift with reservation" and considered to be still in the estate.  If it is a genuine gift, it would be considered outside the estate after seven years - if less than seven years I think it would be deducted from the nil rate band (so no saving from the arrangement).

On the wider equity release issue the main problems are not being able to downsize due to the debt being to large, so that there isn't enough money left to buy somewhere decent after its deduction and what happens if one or both your parents needs to go into care.

Seems like a fantastic idea to me. Bring your inheritance forward 'x' amount of years to save you thousands over time.

You'll be pleased to know that BorntoBubble is definitely wrong. Of course your parents can give you money, it's theirs to do with exactly as they please. They can withdraw it in cash and set fire to it if they want to. It's subject to UK tax laws but as long as it's all recorded for IHT purposes should the unfortunate happen then you won't have any issues at all.

If your siblings are for it and it's covered fully within the will I can't see an issue with that side of things.

If they 'gift' you the money then after seven years it's free of IHT. This will probably mean that with the future changes to IHT bands that none of your siblings eventual inheritance is subject to IHT thus saving them some tax.

If they 'lend' you the money and you pay interest then they'll have to pay income tax on the interest so bear that in mind. Also as it's a loan then it's always an asset of theirs so will be subject to IHT.

The biggest issue I can see is them being able to borrow £300k. How old are they? Do they both have incomes? If they're 60+ and retired they're going to struggle. If they're in their 50s with a combined income in excess of about £50k it should be fine.

Have you considered taking 100% of your inheritance now? If the pot is £1M you take £333k and have yourself written out of the will completely. Your 'rents pay the mortgage so that is effectively coming out of your siblings inheritance. Long term for tax purposes it should work out fantastically for all of you although you miss out on any gains your parents make between now and them passing. Obviously issues to consider with paying for care in the future if that comes out of the estate as you wouldn't have to finance it.

Definitely loads to discuss with your family but it has lots of potential for everyone as long as you consider all of the potential future issues and make sure everybody knows what they're getting in to. The last thing you want is future family squabbles over money especially as you clearly now are all very agreeable.

Equity release criteria is very different to normal mortgage criteria, got to be 55+ and no income required as long as the house value is sufficient.

Hopefully they're actually looking at releasing equity via re-mortgaging as it'll be a lot cheaper and give many more options.

Actually equity release is quite specialised and as far as I'm aware means they sell a chunk of their house usually to an insurance company of some kind.

If they hit the criteria for a re-mortgage and can be at an LTV of less than 60% they'll be paying as little as £3k per year interest on £300k

Not nowadays, I've explained what it is in my post. 

Also as I said it isn't clear what OP's parents are looking at.

Is it some kind of Lifetime mortgage product Dakky?

There are few of these that now allow payments against the interest

Pretty sure that a loan taken against the value of a house is just a different way of saying 'sell a chunk of your house'.

There will be a charge against the property meaning the financer effectively owns that bit of the house. The interest on the loan will be huge (compared to a mortgage) and if they live long enough the finance Company will eventually be owed so much that there's no equity left and the siblings get cock all.

If it really is an equity loan then they need to be really careful as it's likely the siblings inheritance will be impacted upon.

ok gl

They need to be 55+ to be able to do this, you need to able to show a suitable income to do what they are talking about but they can use your income for it, looking at interest rate around 4.7%.

You are correct in that next on kin cant be asked to pay the balance until either 2nd death or after the 2nd person has been moved into long term care.

To be able to raise £300k on a £1m property you would need your parents to both be over 65 as its done on a % of the value of their property.

Thanks for all your words.

Yes for sure it is a equity release they are looking at. I have been told today it will be 4% approx interest. It's a loan which is paid back with (what can be significant) interest start they both die. It would actually be going into a trust and not my name because I'm a degen at heart and they want to mitigate any risk (and I don't blame them)

Evilpie I wouldn't want them to remortgage their house. The sort of thing is called a lifetime mortgage. One thing that has come up is the issue about what it the house needs to be sold to fund their care.

They are 69 and 75. My mum still works and earns ok (not amazing) money and likely will continue until she is much older.

My dad lost a lot of his pension to the equitable life meltdown.  If it's relevant.

My siblings and I are close, and wouldn't want to leave anything in a situation to endanger that for sure.

I think it will likely happen to some degree. Obviously they have and are taking specialist advice but I thought perhaps people may had some input to any pitfalls (and any advice of "don't do it!! Do do it!!)

Thanks

Well I didn't think I did (want to look at remortgage) but that interest level is compelling... Could you expand a bit more please?

There are some good equity release lenders and there are some poor. 

I don't touch it myself, the rewards for an advisor are pretty lucrative but there is so much work required and hand holding the potential applicants I have decided the risk reward factor isn't in my favour. 

If this is something they are considering seriously speak to a few different advisors and take some tme to see what they offer and look carefully at the providers. 

Assuming they have savings can they "gift" you a deposit and you then look at getting a mortggae in your own name.  It might mean you don't initially get the property you want but it is far more satisfying having your own place than paying someone elses mortgage. 

Given the ages of your parents they will also struggle for decent re-mortgage options if that was something they were considering. 

There will be someone who will give them funds but it won't be any of the high street lenders it's likely to be someone like Earl of Shilton or The Hanley.  Don't quote me on those 2 I am using them as examples. 

The immediate thing that leaps out at me is that 4% on a £300k loan is £1000 per month in interest. Throwing £1000/m down the drain in interest to avoid throwing £800/m down the drain in rent seems a bit silly to me.

Your parents are too old to get a mortgage of £300k without a large guaranteed income so them re-mortgaging isn't an option.

Do they have any cash savings? I'd assume that with a £1M home they have a few quid stashed away somewhere.

Is there any chance of you getting a mortgage? The key is how much you earn. Are you prepared to divulge that little snippet? If you can get your hands on £30k for a deposit then a £270k mortgage will cost you under £900 per month which is less than the interest on that equity loan. Barclays (and probably others) do a family springboard mortgage https://www.barclays.co.uk/mortgages/family-springboard-mortgage. You can get one of these if your parents or siblings can offer up 5% as a deposit guarantee. The rate isn't great at 2.99% but it's still a chunk better than that equity loan.

If you don't know that there are 1% mortgages available I'd suggest that you're a hell of a long way away from being ready to make any decision of this magnitude. I'm not going to tell you where they are because you can find out yourself in about two minutes doing what you need to be doing, research!!

A few places that I suggest you spend a bit of time:

https://www.moneysavingexpert.com/mortgages/best-buys/
https://www.gov.uk/inheritance-tax/overview

If a mortgage for you is out of the question then how about your siblings borrowing money to give to you? They could help you to buy a home and in return you write off a chunk of your future inheritance. My parents did that for my dads sister years ago to help her get on the property ladder.

You have loads of options and I'd be amazed if equity release is the best of them. Having a loan secured against a property is basically a mortgage. You can give it a different name to exempt it from the rules surrounding mortgages, rules put in place to stop people getting in to trouble, but at the end of the day this 'lifetime mortgage' that you describe just sounds like a shit mortgage. You say that you don't want your parents to re-mortgage but 'lifetime mortgage' doesn't half have a mortgage type vibe attached.......

Please prove me wrong if you can I'll happily accept it if I am.

Sorry I couldn't offer anything as constructive as "ok gl" but this is all I have.

The internet is dangerous.  Everyone thinks they are experts on everything. 

The Barclays springboard option has a pretty tough underwriting criteria, and some quirks in the application process.  In terms of being cost effective it's not so great.  It's also a 3 year fixed rate. 

The best thing for Dakky to do would be to approach someone who does this sort of thing day in day out.  There are loads of brokers out there, some good some not so good.  Look for recs from friends or family. 

Don't waste too much time on MSM forum, there are some wahoos on there.  There are also brokers on there who won't give you any advice as they aren't permitted to.  The ones who try and tap you up by averting the rules probably aren't worth dealing with. 

To offer any proper advice there is much more information required but is all honesty I'd approach a whole of market broker have a look at a few different ones and get different opinions if you must but you ideally need to do a whole fact find. 

From what you have put here so far an option might be having one of your siblings on a mortgage with you. 

My comment was obviously aimed at you as you are a complete guesser in this area of finance.  You made a comment that showed your ignorance and refused to accept this - "Pretty sure that a loan taken against the value of a house is just a different way of saying 'sell a chunk of your house'." is quite obviously nonsense.

So can you explain what equity release is then and make it sound like something different? I refuse to accept anything without justification.

A loan which can't be paid back until you die and at that point it comes out of the value of your house seems like you're never going to get that part of your house back. How is that different to selling a chunk of your house?

It might be obviously nonsense to you but it isn't to me so explain it rather than giving the typical IFA response of "I'm an expert so just believe everything I tell you and don't question me or I'll call you an idiot".

It should be fairly obvious what the differences are.  If you "sell a chunk of your house", the ultimate payback is clearly affected by the change in the value of the house, but in the case of a lifetime mortgage, the increase in house value can be more or less than the accrued interest.  If the borrower wants to move house, a loan can be rolled over and is transparent.  And if the borrower wishes to terminate the arrangement, the repayment of a loan would obviously be transparent and not subject to potential dispute over valuation. 

As I said it's academic because I don't believe that such schemes exist although I vaguely remember they did in the past.  Which was the initial point I made and you chose to ignore.

So in turn you just try and guess about what is what through looking at some internet pages and then pass it off as "research"

I know you can get a 1% mortgage, but it's for like 2 years introductory.

I. Appreciate the long posts and will look through them properly later, but I'm at work where I earn a paltry living (nowhere near enough to get a mortgage myself, coupled with a terrible credit rating)

Of course I guess at things. Unless you're blessed with 100% knowledge of everything how else can you come to an informed decision unless you start with a guess of some sort? Surely we look at what our desired outcome is, in this case release £300k from a £1M property, then dependent on our prior knowledge we look at ways of doing it and we critically analyse each one in turn until we end up with the best option?

I'm not sure how we're supposed to research anything if we aren't allowed to use the internet? Perhaps I should pick up the yellow pages and ring an IFA?

Am I supposed to just blindly follow what the IFA tells me? You said yourself that there are good ones and not so good ones. I'd listen to their advice and then dependent on how risky the outcome was decide how far to push their advice before going with it. If it's something as serious as releasing £300k from my parents' house that they've worked all their lives for you can bet your ass I'll rip the shit out of any advice to make sure it stands up to every possible downside I can throw at it.

If you tell me to get an equity release mortgage I'm going to do everything I can to convince you that it's not a good idea for me and hope that you have a solid response to shut me up at every turn. If one of those responses is anything like "ok gl" or "So in turn you just try and guess about what is what through looking at some internet pages and then pass it off as "research" then I'm looking for a new advisor who can provide something more constructive.

I haven't claimed to be an expert at all, I've just put a few ideas forward and tried to encourage Dakky to do his own research to make sure he's doing the right thing. The people who appear to be experts seem determined to shoot me down in flames and put me back in my box where I belong. I'm an educated guy but I'm not allowed to question anything without being ridiculed.

I never said to go on the MSE forum. I put a link to the MSE mortgage best buy thing so that Dakky could find one of those <1% mortgages I mentioned. I'm encouraging Dakky to do his own research although apparently looking at internet pages doesn't qualify so he'll have to settle for passing it off as research instead. Perhaps he's allowed to do a 'whole fact find' on the internet instead of research?


 

Apparently they're now called 'home reversion plans'. I managed to find one with a bit of what I used to call research but I'm now passing off as part of my 'whole fact find'.

https://www.moneysupermarket.com/mortgages/equity-release/home-reversion-mortgages/

It is indeed very different to a 'lifetime mortgage' as I now know following what I pass of as my whole fact find. This should have been obvious but as an electrical engineer unfortunately it wasn't.

2 years introductory which then reverts to SVR of say 4% seems better than 4% from day 1 though surely? After the introductory period you're free to shop around again so you can look for another good deal. It may be higher than the 1% if rates have changed but it'll still most likely be better that the equity mortgage rate which I assume just tracks the base rate in some way.

Yeah looks like you're going to struggle with a mortgage from what you've said. It might just turn out that renting is actually the best option.

There are some great mortgage deal around at the moment. I'm just about to shift mine and have managed to bring the term down a bit and save about £100 a month in the process.

I just hate the idea of paying 4% for equity release for the purpose of buying a house. There has to be a better way most likely involving the siblings who potentially have higher earning taking on a second mortgage in return for being gifted a share of the £1M pad.

This needs a huge amount of what I now pass of as a whole fact find.

The decision that Dakky and family make here will have huge repercussions financially that by the time the unfortunate happens and both parents have passed away could cause swings well in to 6 figures.

You need to be so careful if you go down the equity release scheme as that interest rate really is huge on what amounts to a 30% LTV loan.

Dakky,

Your parents will have 3x options basically.

1 - Roll up interest for a lifetime mortgage, can lend parents around a maximum of £345k they are free to do as they wish with the money, for this you are looking at a rate around 6.24% and it will take around 10 yrs as an average to double and then another 10 to double yet again. This product comes with a free valuation and product fee of £599. Although this is a high rate you have to take into account that your parents property will go up in value which helps to reduce it.

2 - Regular monthly Interest Payment, they can pay the interest on the loan until 2nd death at which point you would still owe the initial loan, best available rate is 3.79% but they would have to show a income of around £60k pa - this can be made up of any source (can include pension income).

3- Adhoc Voluntary Interest Payments  - They can take a payment of £300k with the option of paying  adhoc payments for the interest (this could be yearly if you wanted when they recieve a statement of how much interest has been added for the year), best rate at the moment is around 5.74%, this would mean £17k of interest Per year or £1500 per month.

With any Equity release make sure you use a Equity Release Council approved lender / Broker as this means that regardless of how long your parents live they will never owe more than the property is worth . Your parents are both entitled to stay in the property until either 2nd death or 2nd person placed in permanent care, it can reduce inheritance tax liability as the Equity Release Debt will be deducted from the estate before IHT is calculated.

There are two very different schemes available a Life Time Mortgage (Equity Release) or Home reversion plans, with these you effectively sell a fixed % of the property so once its sold the company own that amount.

If you have any questions send me a msg -- yes i do this for a job

You've got a terrible credit rating and think it is ok for your parents to chance their arm with a 300k loan that you need to make some payments on or the interest will balloon before they die?  And good luck to them when they start losing their minds.

Sounds absolutely disastrous for them on the face of it. 

Move somewhere where 100k can get you a flat or think of a plan B. 

Bit blunt, but I was thinking pretty much the same - i'd give my kids a loan for a deposit -maybe even up to the point they could obviously afford the payments on a repayment mortgage but the rest would have to be up to them. I'd also happily suggest they move 20 miles north of here to find more affordable housing. If they weren't prepared to move for affordability or hadn't shown any propensity to look after their cash and be somewhat responsible with money then a simple 'all the best' would have to suffice.

Rolling up interest at 6.24% is as bad it sounds. Total debt each year will be

300
318k
338k
359k
381k
405k
430k
457k
486k
516k
548k

So after 10 years, it property prices stay the same, the equity in the house is down a quarter million. If interest rates go up (which they will) then this will get much worse.

Err well for starters

A)  This was their idea
B)  If you read my first post I said that I didn't know if it was a good idea or not
C) I don't want to move out of London. I was born here and my family, friends and work are here. Why should I?
D) I have paid my rent on time, generally, for the last 15 years. Month after month.
E) they aren't "chancing their arm" as it should, in theory have no affect on them (their accountant and financial advisors will discuss any issues about if they have to go into care)

Also fwiw the figure they have been told is 4%.

I'm well aware.

Just to add your not getting a mortgage at under 1%

RE: Credit Rating don't pay much attention to your rating the lenders don't look at the "score" they are more concerned with the raw data on the report. 

So long as you have no defaults, no CCJ's etc and have kept your payments up-to-date you should generally be ok. 

Your post of not moving out of London though is lol.  If you can't afford to live somewhere then that is the reason why you should move. 

If I were you though and my rent was £800 a month for a studio I'd be off s fast as I could.

Just another thing to add to the equation, have the long term care plans of the OP's parents been taken into account. Given the value of the property it would appear that no assistance will be available from the Government in that regard. If their finances are not robust then taking £300k away from the property could cause more problems than it solves.

IHT ramifications have been mentioned, but in my opinion the £300k would be a potentially exempt transfer and also create issues that would not exist if the money was retained within the value of the property. Normally transfers between spouses are free of IHT, but by giving £300k to the OP it would reduce the nil rate band if both of the parents died before 7 years, I accept this is unlikely but any Financial Advisor worth his/her salt would point this out. Not forgetting that from April 2017 that property passed to children will start to become exempt from IHT where the value is less than 1m (phased in until 2020).

I really would say that a Mortgage Advisor would not be well enough qualified to look at all of the issues that arise from Equity Release (IHT, Retirement Planning, Long Term care needs etc). OP would be better off talking to a Financial Advisor who is authorised to advise on Mortgages.

What others say about equity release seriously eroding the equity in your parents property is true. If they live another 20-30 years there won't be a lot for you to inherit.

I'm sure you know this but for clarity it's the total estate not just the property. IHT is increasing from £325k to £500k (so £1M assuming a married couple) but the additional £175k is for property only.

That's my best guess anyway.

Yes that's what I was trying to say without reverting to jargon,or confuse anyone who isn't from a financial background.

The point's I have made are still valid, it seems crazy to take something that could be tax exempt and expose yourself to a potentially significant amount of tax on it. Although Long Term care has been mentioned, it's a more important part of the equation than the OP may realise. It costs well in excess of £30k p.a.(more in London) to put an elderly person in a home these days.

I'm not certain they make the IHT liability any worse though do they? They take £300k in cash but that would be covered under the existing nil rate and the bit leftover on the property would fall in to the new rules.

In any case the parents aren't too old. They could probably just about squeeze in a life insurance policy held in trust to cover the slight possibility of that big tax hit.

There financial advisors are all on board and think its a great idea apparently.

The interest should be paid down hopefully, it's looking like 3.77% and I am looking for two bedroom properties and getting a lodger, so between us that should cover it. That is the only way I will do it however. Not interested in getting a one bed and potentially leaving interest to roll up and erode that equity.

The care question has been asked and answer by the financial advisors but I personally don't know the implications.

I'm pretty on board with it now. Getting together with my parents and siblings to make sure everything is sorted so any questions or issues about their inheritance are clear (even though no one really wants to talk about it)

Effectively paying 3.77% for a 100% mortgage is actually really good I suppose so it might not be as bad as I originally thought.

As long as the equity release is really tight and they can pay it back in full in the future if they so desire then it could be a great plan. You don't want to be tied in to anything until your parents depart this mortal coil but if it's a 5 to 10 year plan perhaps then it makes sense.

Would your long term plan be to save up and try to go it alone at some point? I guess if the loan against the parents house is staying at the same level then at some point in the future you'd hope your new place would appreciate in value to a point where you could take out a mortgage on it at a decent LTV and pay off the equity loan.

It all comes down to the quality and flexibility of the equity loan really. Whilst the interest rate is currently competitive vs anything else you could get it won't always be so you need a 'get out' option. You don't want to be paying 3.77% (or whatever the future equivalent may be) when your future circumstances mean you could've been on one of those 1% deals and therefore paying off some of your property rather than just the interest.

Be interested to hear what you eventually decide and also hear about how it's worked out in a few years time.

Very best of luck with it all  :)up