Would You Support Your Parent’s Decision To Equity Release?
You’ve heard about equity release and its pros and cons. Last weekend when you went to visit your parents, they spoke about equity release as well. Now, you’re wondering if you should support the decision to take out an equity release loan or not. You’re asking yourself if it’s a good idea for their financial future and health to take out an equity release loan.
We’re here to tell you everything you need to know about how does equity release work so that you can support or discourage your parents regarding equity release.
If you’re unsure whether you should support your parents’ decision to release equity, you’ll probably want to know everything about equity release first. As well as its perks and downfalls, I assume. So, what is equity release, and how does it work?
What Is Equity Release?
Equity release refers to your property’s items/parts that let you access your money tied up in your house. However, you can only gain access once you’re 55 years or older. You can get the capital value of objects in your home as a lump sum or an income based on the house’s value. You’ll just need to repay that money you accessed at a later stage.
Ask yourself this:
Have you been struggling to meet your lifestyle needs, or you need some extra finances to cater to your lifelong dreams? Are you a UK resident, over 55 years, and own a homeowner worth more than £70,000?
If yes, head on over to your financial adviser and start making plans towards taking out an equity release plan. A variety of equity release uses allow homeowners to achieve their future financial desires by unlocking the equity tied up in their property.
As we’ve said before, it’s a secure way to release money that you’ll pay when you die or move into residential care. Its process is also straightforward and easy to understand. That said, here’s a comprehensive guide on the equity release application process.
Typically, the equity release process can take between 4-6 weeks to be completed. However, there have been cases completed in just 18 days. This affords you peace of mind and the ability to use your equity release as needed sooner.
How Does It Work?
Want to know more detail? There are two kinds of equity release options for you to choose from.
- Lifetime Mortgage
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit.
You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
- Home Reversion
The second type is home reversion1, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in regular payments. It’s your choice.
Let’s look at this:
Certain factors will ultimately affect your equity release process’s time scale, placing a delay on your application and hindering a timeous release of monies.
Naturally, you will want to allow your application to progress as timeously as possible. What factors, and how do you ensure your application for equity release moves as fast as possible? What are these core factors?
The core factors that will affect your equity release process are:
- Type Of Property
Some equity release providers or lenders have specifications about your property. Some might deny an equity release plan if your property has a flat roof, for example, or if it’s in a high-flood area.
Some might even have a problem with where the property is situated, for example, if it’s close to a commercial property or construction built according to the correct standard. If your property is also not made according to regulations, you might not get that plan.
- The Lender Involved
As mentioned before, some lenders differ from others. You’ll need to research all the different lenders out there to determine their requirements, terms, and conditions before deciding on one. Some lenders don’t offer any negative equity guarantee, which is quite essential, for example.
This guarantee protects you so that you don’t pay more than you owe to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.
If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from your estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalized to do so. Therefore, consider the equity release firm that will offer you this protection.
- The Efficiency Of Your Solicitor
Ensure that your solicitor is a professional and helps you and not make money for themselves. Get an expert solicitor to help your equity release process along faster.
You might be wondering why we’re mentioning these three factors…
Being aware of these factors is essential. Your equity release adviser, 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 your equity release have shrunk considerably. The industry has progressed to reduce the need for your paperwork, postage, and even your signatures on documents.
Moreover, due to this progression, a more competitive market has evolved, and to navigate this successfully, it’s now within the lender’s best interests to become more efficient.
Supporting Your Parents
Withdrawing money from your home is a critical decision. It’s probably one of the most significant financial decisions people can make and shouldn’t be taken lightly. A home is usually the largest of biggest asset you own. Homeowners typically work very hard to pay off their house throughout their lives. It’s therefore expected that people ask these questions to advisers:
- Do many people take out these schemes?
- Would you do it?
- Are they expensive, like everyone says?
- Would you like your parents to do it?
Now, let’s have a look at these questions.
ER Questions Answered
According to recent reports, a good series market has grown substantially in one year only. The highest amount of money was released in 2016, £2.15 billion to be exact. However, new records have been made. £800 million was released in the last four months of 2017 alone.
The question regarding whether the adviser would take out equity himself or herself when most probably be yes. If you have children or a spouse or grandchildren, you are doing it without hesitation. You can provide children with a significant financial start in life with the money released through equity.
That comes to the misconception of equity being expensive. There’s the lowest interest rate ever at your disposal. Equity release interest rates hit a historically low in 2020 and continue at this low rate into 2021.
Let me tell you.
Guarding supporting parents with equity release is a bit more tricky. Financial advisor himself or probably go with their parents to an equity release advisor and assist in the consultation. They’ll probably ask their parents the following questions:
- Have you considered downsizing?
- Can you apply for means-tested benefits such as pension or council tax reduction?
- Would you consider selling your home or moving into a rental home?
- Can they look at equity release?
Now, these questions are there essential to consider with your parents. However, most parents have concerns such as reducing your and your siblings’ inheritance. This is the most common concern for equity release because parents want to leave their children with a considerable amount of money when they pass away to cook for them for the rest of their lives.
Look at this.
However, equity release has never been as safe as it is today. All equity release schemes of plans have to be fully regulated and controlled by the FCA. These kinds of protective barriers include no negative equity guarantee, which is forced by the ERC and protects you from any maltreatment 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 & Features
Most parents concerns are how much money they’ll leave their beneficiaries. Because of this and 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.
Now, what is this guarantee?
Well, in simple terms, inheritance protection makes sure you’re there, and fisheries will retain a fixed percentage of your property once the property is sold at the end of the loan term. Most lenders offer this option, Aviva, Legal & General, More2Life & Retirement Advantage, to name some.
There’s another way.
You can also alleviate your parents’ fears by employing balance control measures. That way, the equity release mortgage want to roll up in the future. Up-to-date, there is a prevalent and innovative inheritance protection feature called voluntary repayments. This means that you make voluntary repayments to the provider up to 10% of your initial loan.
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 facility to help their consumers reach their potential.
There is another solution to cope with the stress of equity release for your parents so that you can support them. That is drawdown. When an equity release scheme functions of the drawdown facility instead of taking a lump sum at the beginning of the lantern, interest will only be charged on the money they withdraw, saving them money in the long term.
Most providers have this facility and the facilities 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’ll be able to live in the house that they’ve been in for 40 years and remain happy until the day they pass away. This will also save them from the inconvenience and uncomfortable situation that comes with moving—the cost of moving also been bypassed.
Let me tell you something else.
If the property’s value is lower and they couldn’t downsize, they wouldn’t get much money. Furthermore, downsizing wouldn’t have given them enough extra cash to serve any purpose. However, there is another way you can use equity release to help fund the cheaper property.
We asked people who took out equity release three years ago if they regret it.
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 a lot with its extra space and rooms. Their savings interest they’re getting is also very low, on top of making them unqualified for their means-tested benefits.
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 felt that it was the best way forward for them. Most have never looked back!
Will I Lose My Inheritance?
You might be concerned that releasing equity would eat up your entire inheritance. Is that true?
It’s still possible for you to get your inheritance after they’ve released equity from their home. If they stipulated so in their will, there’s nothing to worry about. However, the estate will just be a bit less than it would’ve been before equity.
It’s 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 reasons people take out equity release plans.
Please speak to an independent tax adviser before you do anything, just so that you know everything you should. But, all in all, there’s no limit as to what your parents can do with that money.
Say you want to live in their house one day, and they haven’t taken out equity yet.
In that case, you’ll have to intervene because the house will be sold upon their death. The leftover money will go to their beneficiaries. So, if you want to be the new owner of that property, you should pay off the debts before the house gets sold.
It’s a good idea to discuss Will & Estate Plans with them so that you’re sure of what’s in their will and what they want to happen to their house. Be careful, however, as the FCA doesn’t control these plans.
If your parents already took out equity and you want to live in their house once they’re dead, you’ll have to talk with the rest of the family. You’ll have to consult the provider and ask to change the contract, making you a devisee. There’ll be fees and extra costs once you’re the new owner, so be aware of those as well.
What other costs are involved in equity release? And will this best suit your parent’s situation and gain your support?
What Fees Will They Pay?
We’ll guide them through all the services they’ll need. But don’t stress. These are very similar to your mortgage if you’ve taken one out already.
They’ll need to budget for these three services when you’re calculating your equity release costs:
- Surveyor’s Valuation or Property Valuation Fees
Depending on the plan, they’ll be required to pay for a survey2 of the property. It’s 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 its value. The surveyor will send the valuation report to your lender. It’s then their choice if they want to go with that specific surveyor or not.
Let me tell you something…
If they’re satisfied with your property’s valuation, they can then start focussing on the following steps: considering age, health and lifestyle. After considering these, choose the right offer for you. It’s all up to them.
So, what’s next?
Well, as with any other mortgage, they’ll 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’re eligible to borrow.
- To make sure that the property is in excellent condition. If it isn’t 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.
- 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.
You might be wondering what then?
Well, if you’re satisfied with the offer and you choose to go ahead with it, you have to instruct a solicitor. It’s 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’re free to choose your solicitor. However, it’s always better to handle your case with a solicitor with equity release transactions experience. Usually, you’ll pay roughly £1,250, depending on their criteria. Remember to include this cost in your equity release set-up costs.
- Lender’s Application Fees
Once again, similar to a regular mortgage, you might need to pay an “application” or “admin” fee 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.
Luckily, with so much competition among equity release providers, there are many special offers where you won’t be charged any application fees or cheaper admin fees.
What’s the Total Cost?
The estimated total cost is roughly £1,850. However, each application will be different. For example, some plans don’t require you to pay a lender’s application fee or a survey fee. It’s vital to speak to an expert equity release adviser so that you know beforehand what you’ll be paying.
The simple answer is yes, you do. Equity release plans based on lifetime mortgages need the youngest customer to be over 55 years old, while those based on home reversion plans require you to be at least 60 years old. This is because equity release is made essentially to give extra money to people who are in retirement.
The main con of equity release is that it doesn’t give you the entire market value for your property. Your parents will get much less money than they would if they sell the property on the open market – although in that case, they’d still have to find another home to live in.
Equity release is a way to retain use of their house or other objects with capital value while also getting a lump-sum or a constant income, using the house’s value. The “catch” is that the income-provider has to be repaid in the future, usually when your parents die.
Retirement interest-only mortgages are a better way to get money compared to other equity-release products. These mortgages are an excellent alternative to equity release for older borrowers like your parents, but they have previously received little praise, with providers making products available very slowly.
You need to know everything about equity release before you can support your parents in their equity release journey. Hopefully, this article educates you, and you feel at peace to support them on their fantastic equity release process.