Should I Support My Parent’s Decision To Release Equity?
Have your parents recently discussed equity release, and you’re wondering if you should support them on this journey? We do not doubt that you’re asking yourself if it’s a good idea for their financial future and health to take out an equity release loan.
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, including its perks and downfalls.
So, how does equity release work? We’re here to tell you everything you need to know about it!
What’s Equity Release?
Equity release refers to a financial product that allows your parents to unlock the cash tied up in their home. However, it can only gain access once they’re 55 years or older. They can get the capital value of your home as a lump sum or an income. The amount available is based on the house’s value.
The money will then be repaid from the sale of your parents’ home when they pass away or move into long-term care. If you want to keep their house and have the means, you might be able to pay back the loan, plus interest from alternative means.
Ask yourself this:
Have your parents been struggling to meet their lifestyle needs, or do they need some extra finances to cater to their lifelong dreams? Are they UK residents over 55 years of age and own a home worth more than £70,000?
If yes, head 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 will be repaid when they die or move into residential care. Its process is also straightforward to understand. That said, here’s a comprehensive guide on the equity release application process.
Typically, the equity release process can take between 4-12 weeks to be completed, depending on the lender, the type of plan, and your personal circumstances. However, there’ve been cases completed in just 18 days. This affords you peace of mind that your parents will be able to use their equity release funds promptly.
How Does It Work?
Want to know more detail? There are 2 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 your parents take out a mortgage on your home if it’s their primary residence. However, they’ll remain the owner. They’ll 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’s any loan amount or any accrued interest, it’ll be paid back when they pass away or need long-term medical care.
- Home Reversion
The second type is home reversion, 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 your parents a lump sum for it, but they can also pay it in regular payments. It’s your family’s choice.
Let’s look at this:
Certain factors will ultimately affect your parent’s equity release process’s time scale, placing a delay on your application and hindering the timely release of monies.
Naturally, you’ll want to allow your application to progress as timely as possible. What factors, and how do you ensure your application for equity release moves as fast as possible? What are these core factors?
Factors That Affect Your Equity Release Process
- Type of Property
Some equity release providers or lenders have specifications about the property in question. Some might deny an equity release plan if the 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 ‘no negative equity guarantee1‘, which is essential.
If the estate market value decreases and the money can’t repay your mortgage, the lender won’t request more cash from the estate or heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t legalised to do so. Therefore, you must consider the 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
You might be wondering why we’re mentioning these 3 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 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’s now within the lender’s best interests to become more efficient.
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 survey 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 then send the valuation report to your lender. It’s then their choice if they want to go with that specific surveyor or not.
If they’re satisfied with your property’s valuation, they will then start considering the following: your age, health, and lifestyle.
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)3 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, there are many special offers with so much competition among equity release providers 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 but can range up to £3,000. 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.
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 it shouldn’t be taken lightly. A home is usually the biggest asset you own. Homeowners typically work very hard to pay off their houses 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?
Supporting parents with equity release is a bit more tricky. When your parents hire a financial adviser or an equity release adviser, they’ll probably ask your parents the following questions:
- Have you considered downsizing?
- Can you apply for means-tested benefits such as pension or council tax4 reduction?
- Would you consider selling your home or moving into a rental home?
- Can they look at equity release?
Learn all the: Pros and Cons of 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 want to leave their children with a considerable amount of money when they pass away to ensure that they’re looked after for the rest of their lives.
However, equity release has never been as safe as it is today. All equity release schemes have to be fully regulated and controlled by the FCA5. 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 will be left for their beneficiaries. 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.
Now, what is this guarantee?
Well, 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 & Retirement Advantage.
There’s another way.
You can also alleviate your parents’ fears by employing balance control measures. That way, the equity release mortgage won’t roll up in the future. There is a prevalent and innovative inheritance protection feature called voluntary repayments. Meaning 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 feature to help their consumers reach their potential.
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’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, discomfort, and expense of moving.
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.
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.
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 be 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 reason people take out equity release plans.
Please speak to an independent tax adviser6 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 and estate plans with them so that you know what’s in their will and what they want to happen to their house. Note that 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 to 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.
Got Questions? Check These First
What's The Best Age For Parents To Take Equity Release?
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.
What's The Downside For My Parents To Equity Release?
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.
What's The Catch With Equity Release For My Parents?
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.
Is There A Better Alternative To Equity Release My Parents Should Consider?
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 what’s 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. Also, speak to an independent financial adviser to determine if equity release is right for your parents and discover the equity release alternatives.