Are you wondering how you can support your parents' decision to release equity?

Have your parents recently discussed equity release, and your are wondering if you should support them on this journey?

We do not doubt that your are asking yourself if it is a good idea for their financial future and health. 

As equity release experts, we can help you decide whether you should support your parents' decision to release equity by highlighting its pros and cons.

Therefore...

What is Equity Release?

Equity release refers to a financial product that allows your parents to unlock the cash tied up in their home.

However, they can only access these plans once they are 55 or older.

They can get the capital value of your home as a lump sum or access to a cash facility.

The amount available is based on the property value.

The loan will then be repaid from the sale of your parents' home when they pass away or move into long-term care.

If you wish to keep their house and have the means, you may be able to repay the loan plus interest using alternative means.

Ask yourself this:

Have your parents been struggling to meet their lifestyle needs, or do they need some extra finances to cater for their financial goals for retirement?

Are they UK residents over 55 years of age, own a home worth more than £70,000, and have no more than two people on the property deed?

If yes, you can head over to your financial advisor or broker and start making plans towards taking out an equity release plan.

If your are wondering what can you use equity release for, there is a multitude of ways to use the money to improve your parents' lives, or that of your family.

Here is a comprehensive guide on the equity release application process.

Typically, the equity release process can take between four to twelve weeks to complete, depending on the lender, the type of plan, and your personal circumstances.

However, there have been cases where the process was completed in just eighteen days.

This affords you peace of mind that your parents will be able to use their equity release funds promptly.

How Does It Work?

There are two types of equity release for you to consider. A lifetime mortgage and a home reversion plan.

Lifetime Mortgage

The first type of equity release is a lifetime mortgage. This type lets your parents take out a mortgage on their home if it is their primary residence.

However, they will remain the owner. They will have the option to ring-fence part of their property for you and your family to inherit.

You can also make repayments or let the interest increase.

Better yet, if there is any loan amount or any accrued interest, it will be repaid when they pass away or need long-term medical care.

Home Reversion

The second type is a home reversion plan, which means your parents will sell some or all of their property to a provider while retaining the life-long right to live there.

The home reversion provider will then pay your parents a lump sum for it or give them access to a cash facility.

Consider:

Certain factors will ultimately affect your parent's equity release process time scale, placing a delay on your application and hindering the timely release of monies.

Naturally, you will want to allow your application to progress as timely as possible.

What are these core factors that affect the application process?

Factors That Affect Your Equity Release Process

Factors that may affect your parents' equity release process include the type of property, the lender they have chosen and the efficiency of their solicitor.

A closer look at each of these.

Type of Property

Some equity release providers or lenders have specifications about the property in question.

Some may deny an equity release plan if the property has a flat roof, for example, or if it is in a high-flood area.

Some may even have a problem with where the property is situated.

For example, if it is close to a commercial property or construction built according to the incorrect standard. If your property is also not made according to regulations, you may not get that plan.

The Lender Involved

As mentioned before, lenders differ.

You will need to research the different lenders to determine their requirements, terms, and conditions before considering any of them.

You will also need a financial advisor or broker to assist you with the decision-making and the rest of the process.

Some lenders do not offer any 'no negative equity guarantee', which is essential.

A no-negative equity guarantee means that if the estate market value decreases and the sale cannot repay your mortgage, the lender will not request more cash from the estate or heirs.

Therefore, you must consider an equity release firm that will offer you this protection.

PRO TIP: Never use a lender that is not a member of the Equity Release Council!

The Efficiency of Your Solicitor

Ensure that your solicitor is a professional that takes your best interests into consideration.

Get an expert solicitor to help your parent's equity release process move along faster.

You may be wondering why we're mentioning these three factors?

Being aware of these factors is essential.

Your equity release advisor or broker, alongside a case management team, expertly coordinates all the parties involved to ensure your equity release process is as fast and seamless as possible.

With the introduction of online case management, timescales to take out an equity release have shrunk considerably.

The industry has progressed to reduce the need for your parent's paperwork, postage, and even a signature on documents.

Moreover, due to this progression, a more competitive market has evolved, and to navigate this successfully, it is now in the lender's best interests to become more efficient.

What Fees Will They Pay?

The fees they will pay are very similar to those of a mortgage if they have taken one out already.

It is vital to budget for these three services when calculating equity release costs: 

#1. Surveyor's Valuation or Property Valuation Fees

Depending on the plan, they will be required to pay for a survey of the property.

It is one of the critical costs of equity release. Now, this happens even before you take out equity release.

What does this mean for them?

The surveyor will come and look at the property to determine it's value.

The surveyor will then send the valuation report to your lender. It is then their choice if they want to go with that specific surveyor or not.

If they are satisfied with your property's valuation, they will then start considering the following: your age, health, and lifestyle.

What comes next?

As with any other mortgage, they will need to give the lender an independent survey and property valuation. Why? 

•  They receive the current market value for the property (based on the recent sale prices of similar properties). That way, their lender can calculate how much they are eligible to borrow.
• To make sure that the property is in excellent condition. If it is not well looked after, the lender may not accept the offer. They can also insist that your parents repair the property.

These valuation fees are always dependent on the estimated value of your property. Better yet, most lenders do a free valuation nowadays.

#2. Solicitors' Fees

The Equity Release Council (ERC) has specific rules for taking out an equity release plan.

Their rules state that your solicitor needs to be independent of the lender's solicitor. You also need to have a minimum of one face-to-face meeting with that solicitor.

What then?

If your are satisfied with the offer and you choose to go ahead, you must instruct a solicitor.

It is best if you select an expert independent equity release solicitor.

They take care of all the legal work for you, and they ensure that everything works smoothly until your funds are released.

Best of all…

You are free to choose your solicitor.

However, it is always better to handle your case with a solicitor with equity release transactions experience.

Usually, you may typically pay £1,250, depending on their criteria. Remember to include this cost in your equity release set-up costs.

#3. Lender's Application Fees

Once again, similar to a regular mortgage, you may need to pay an "application" or "administration" fee required by the lender.

These fees generally cover legal costs and set-up costs.

Depending on the lender and your recommended plan, the prices usually range between £0 to £695*. Remember, adding it to your loan will accumulate compound interest.

*This is for indicative purposes only.

More!

As a result of so much competition among equity release providers, there are often no application fees or cheaper administration fees offered.

What is the Total Cost of Equity Release?

The estimated total cost of equity release is roughly £1,850, but can range up to £3,000.

However, each application will be different.

For example, some plans do not require you to pay a lender's application fee or a survey fee.

It is vital to speak to an expert equity release adviser so that you know beforehand what you may be paying.

Supporting Your Parents

Withdrawing money from your home is a critical decision.

It is probably one of the most significant financial decisions people can make, and it should not be taken lightly.

A home is usually the biggest asset you own. Homeowners typically work very hard to repay their mortgages throughout their lives.

It is therefore expected that people ask these questions to advisers: 

• Do many people take out these schemes?
• Would you do it?
• Are they expensive?
• Would you like your parents to do it?

Supporting parents with equity release is a bit more tricky.

When your parents hire a financial advisor or an equity release adviser, they will probably also be asked some questions.

These questions could include:

• Have you considered downsizing?
• Can you apply for means-tested benefits such as pension or council tax¹ reduction?
• Would you consider selling your home or moving into a rental home?
• Can they look at equity release?

Now, these questions are essential to consider with your parents.

However, most parents have concerns, such as reducing your and your siblings' inheritance.

In fact, this is the most common concern for equity release because parents typically want to leave their children with a considerable amount of money when they pass away to ensure that they are looked after for the rest of their lives.

Great news!

Equity release has never been as safe as it is today.

All equity release schemes must be fully regulated and controlled by the FCA.²

These kinds of protective barriers are supervised by the ERC and protect you from any maltreatment, misinformation or irresponsible guidance from your equity release providers.

In recent years, several equity release customers have been using the funds released for their children rather than themselves.

But, how can you ensure your parents will leave an inheritance?

Inheritance Protection Design and Features

Most parents' concerns are how much money will be left for their heirs.

Because of this fear, equity release providers have instigated an inheritance protection guarantee, meaning some lenders automatically include this guarantee in their plans.

If the equity release maximum is not taken out, providers will also include this plan feature.

However, other providers will charge you a fee for this privilege.

What is the guarantee?

In simple terms, inheritance protection makes sure beneficiaries retain a fixed percentage of your property once the property is sold at the end of the loan term.

Most lenders offer this option. Here are three companies worth contacting:

• Aviva
• Legal & General
• More2Life

Another way...

You can also alleviate your parents' fears by employing balance control measures.

That way, the equity release interest will not accrue too much in the future.

There is a prevalent and innovative inheritance protection feature called voluntary repayments.

This way, parents can stop the loan from rising and maintain a level balance.

They can even reduce the loan throughout their retirement. All lenders now use this feature to help their consumers reach their potential.

Finally…

There is another great equity release option for your parents called drawdown lifetime mortgages.

Instead of taking a lump sum initially, interest will only be charged on the money they withdraw, saving them money in the long term.

Most providers have the options mentioned above; therefore, drawdown lifetime mortgages are the most popular form of equity release on the market today.

Your parents should know that they can use equity release for other reasons as well.

Equity Release for Upsizing or Downsizing

Your parents take out an equity release plan and stay in that house even though they took out a loan against it.

In other words, they will be able to continue living in the house and remain happy until the day they pass away.

This will also save them from the inconvenience, discomfort, and expenses of moving.

If the property's value is lower and they cannot downsize, they may not receive much money.

Furthermore, downsizing would not provide them enough extra cash to serve any purpose.

However, there is another way you can use equity release to help fund the cheaper property.

Do Some Parents Regret Equity Release?

This couple deposited the house sale proceeds into different deposit accounts as they felt scared to spend too much money.

They were aware that they would have to repay the loan and pay rent for the rest of their lives.

On top of that, even though they lived in a nice area, they missed their old house with its extra space and rooms.

The savings interest they're getting is also very low, on top of making them unqualified for their means-tested benefits.*

*This is just for illustrative purposes.

Simply put:

Make sure downsizing is the way to go instead of taking out an equity release plan.

Most children are reported to support their parent's decision and feel that it is the best option for them.

Will I Lose My Inheritance?

You may be concerned that releasing equity will eat up your entire inheritance. Is that true?

It is still possible for you to obtain your inheritance after they have released equity from their home.

If they stipulated so in their will, there is nothing to worry about. However, the estate will be less than it may have been before equity release.

Now:

It is possible to secure your inheritance with a guarantee. Some parents opt for a type of living inheritance, meaning they give you a monetary gift.

This seems to be the most common reason people take out equity release plans.

It is important to speak to an independent tax advisor³ for personalised advice.

If you want to live in their house one day, and they have not taken out equity.

In that case, you may need to intervene because the house will be sold upon their death.

The remaining funds will go to their beneficiaries.

If you wish to be the new owner of that property, you should pay off the debts before the house is sold. 

It is a good idea to discuss will and estate plans with them so that you know what is in their will and what they want to happen to their house.

If your parents already took out equity and you want to live in their house once they have passed away, you may need to talk to the rest of the family.

You need to consult the provider and ask to change the contract, making you a devisee.

There will be fees and extra costs once your are the new owner, so be aware of those as well.

Common Questions

In Conclusion

You need to know what is equity release and how it works before you can support your parents on their equity release journey.

Whatever the final decision, you must be sure to involve the whole family to consider everyone's best interests.

You can help and support your parents' decision to release equity by speaking to an independent financial advisor to discuss possible alternatives and determine if equity release is right for them.