More a WWYD re- Parents and money

[PyongyangKipperbang]

Been at work and thinking about it all evening.

My parents spoke to my sister and I recently about how they want to gift us some money. They are planning on giving me enough to may off my mortgage (2 years to go on a small mortgage) and the same to my sister to cover the house improvements they need or to go towards their mortgage (not long moved so a lot longer to run).

The thing is, my sister and I really dont know whether to take it. It feels wrong but I cant work out why.

The are doing equity release which straight away we didnt like but they are doing it through a specific scheme which is not one of those "back pages of the Daily Mail" jobs, the numbers have been crunched and they will still have a sizable ownership of their house and it isnt as dodgy as sister and I first thought. Their reasoning is that they would rather us have some of our inheritance now when we need it (I lost my job due to covid and need to retrain to earn anything more than NMW and my sister has had to "downsize" her career from management due to covid too).

But.......it just feels wrong! I know that my mother especially would feel a lot happier knowing that we are financially secure. I would own my house outright which would mean that whatever happens I would be housed if nothing else. My sister would have the pressure taken off in terms of finding money for house improvements that are desperately needed and they could afford when they bought the house just a few months pre covid. Security is a massive thing for my mother and knowing we had that would help her sleep at night.

It never occurred to either of us that they would do this so we are both in shock. I think they expected more of an enthusiastic reaction but we were both quite reserved, I explained it wasnt because we are ungrateful but that we have some doubts and feel a bit wobbly about it all.

The irony is that if I could do this for my adult kids I would in a heartbeat so I totally understand where it is coming from. My sister is childless not through choice but I know she would do it for my children who she adores.

I am just so torn!

And yes, I do think pride is a big part of it for both of us.

We have yet to find out if there is an emphatic adjustment in house prices. There is some uncertainty in general around interest rates.

If the value of your parents home drops significantly, I assume the value of the loans stays the same & therefore the % of your parents’s ownership falls? What happens if interest rates rise, does this affect the t&c of the scheme.

I’d be cautious about an equity release scheme when your parents are of an age & vigour where downsizing &/or moving closer to you &/or your sister may release capital & they still have 100% ownership of the roof over their head.

I understand that they want to help you both & enjoy the pleasure of seeing both more settled, & there is a strong case for estate planning so that gifts are made ina tax efficient way. At 70yo, they may feel that this is the time to start moving some money over to you both & if they have that money sloshing about, this is sensible.

But buying a product to achieve that is risky as their are putting a legally binding charge on their primary asset which is their home.

I’m not an IFA or super savvy about finance, but my gut feeling is that your parents are putting themselves out for you both which is lovely, kind & savvy, but at too high a risk.

Are they resolute about staying put? Is it a forever house?

@ComeSailAway

They want to see you enjoying the money while you are young enough to need it. Let them do this for you.

Another point is that you may find your inheritance is sold to pay for care home fees if needed in future. Your parents would rather help you out.

"Your inheritence is sold to pay for care home fees..." Wow, what a selfish sentence

They are doing it out of love and want to do it while you need it.
I inherited a sizeable amount 10 years ago and gifted a 3rd of it to my son and his partner to pay off a big chunk of their mortgage. It made me so happy to do that.
Your parents are probably the same.

I'm not sure the longterm financial advisor is that great tbh.

I haven't read the whole thread .

Any equity release scheme is a no no red flag to me , no company loans money to your parents for their benefit and neither you or your sister are in dire straits .

It doesn't sound a huge sum of money and if they can't raise it from savings I would say they can't afford it .

On a practical note I wouldn't want to be sorting out and paying back loans when your parents have passed, much better to own the house outright.

They worked and saved for years to buy in help and care as needed as they age. Particularly when one is left alone. Give it away too soon and guess who that job will fall to. And have no doubts, as lovely as they are there will be that expectation. I've seen it happen with SIL who now can't prioritise her own life.
Be careful. Be beholden to no one.

They would actually be better off selling the house giving the money to you and renting in their dotage. That way they’re not responsible for any maintenance. Ideally you use the money to put down 25% deposit between you and your sister so that you are the landlords. And then if they need to go into any sort of care facility person at arm’s-length transaction.

OP if they had the money in savings and wanted to give it to you I would say take it. But doing equity release on their home is insanity.

MIL (despite being advised against it by us) secretly took out an equity release mortgage on her home for less than half its value 15 years ago and gave the proceeds to BIL. 8 years later she needed to move house as she had mobility issues and couldn’t manage stairs. When she admitted to the loan and we looked into it, the amount she owed with capital and interest was over 120% of the house value as house prices had dropped due to the financial crash. She ended up stuck in the house for several years living downstairs only. When we pursued BIL for the money he had taken he refused to cough up anything. The fallout for the extended family has been terrible - it has ripped it apart really.

Please don’t do this - things may not work out as they have been advised.

I wouldn't because it's equity release so they will get charged interest on that money and hopefully they do live another 20/30 years but that will be a long time for interest to accrue. You've only got two years left on your mortgage anyway. If they had spare cash or were downsizing I would take it.

@SquirrelG

I think it's a great idea. If parents can afford to help our their children at the time when they need some help it's a brilliant idea. Don't feel bad about it, it's what they want to do and it will make them feel good.

Equity release is NEVER a good idea

@tkwal

IHT may not be an issue for your parents but income tax could be for you. Your parents are allowed to gift as much as they want but if it's more than £3000 per person per tax year the recipients will be liable for tax on the excess. It must be declared on your tax return so if you're on PAYE you will have that added complication too

This is just not true. Do your research before spouting out made up advice on the internet.

No wonder you’re concerned - neither you or your sister really need this help if it undermines your parents security. Presently we have low interest rates but these could go much higher.
Friends of my parents did this and after they’d both died the company wanted repaying yet the house wouldn’t sell.
The interest charges went up and it was a real worry; when the house sold - years later - the interest took up much more of the equity than expected.

@tkwal

IHT may not be an issue for your parents but income tax could be for you. Your parents are allowed to gift as much as they want but if it's more than £3000 per person per tax year the recipients will be liable for tax on the excess. It must be declared on your tax return so if you're on PAYE you will have that added complication too

Not one word of that is true.

There is no such thing as “gift tax” in the UK where I am assuming OP is.

I think if they had the cash that's fine but Equity release is for me a last resort

I am not as against equity release as some people, I may even consider it for myself in due course. But accepting this does feel a bit selfish, you are two years off paying off your mortgage, you surely don’t desperately need this money right now. I’d tell them to look after themselves, enjoy themselves and let the inheritance be just that, an inheritance.

Oh, now that I've read it will be from equity release, then I agree, you are right to be dubious. I don't think it's a good idea at all - I had imagined they were gifting you money from savings, which is a completely different thing.

The local authority will only pay for minimal care and it won’t lead to a pleasant life. Will be left with enough to pay for it, to pay for a cleaner and some one to do their shopping, for a lunch time care visit or will you be doing that?

HMRC doesn't count cash gifts as income, soyou won't have to pay any income tax on cash gifts received from parents(or grandparents for that matter). However, if you make any income from that gift, even if it's interest earned in a savings account, you may be liable to pay tax on it

Just to clarify that nonsense.

Equity Release. Hmm. I work in mortgages and protection and most of my colleagues are incredibly wary on advising someone to do equity release. I'll be honest with you, I think its going to be the next big complaint (like endowments were).

If I had a mortgage and my parents didn’t, I can’t foresee any circumstances where I’d feel comfortable them going into debt so I was debt free. Give away cash, fine. Downsize and give away the excess, fine, if that works for them. But encumbering their home with a chunk of debt when no one knows what they’ll need to do in 10 or 20 years time is madness IMO

Martin Lewis's guide to equity release is worth reading.

One thing that struck me is that you're thinking of using the equity release money to pay off your mortgage. This might make sense if you're struggling to make the payments but it's worth thinking about whether it's a good idea otherwise- ER rates tend to be significantly higher than ordinary repayment mortgages, so effectively your parents are borrowing at a higher rate to pay off a debt at a lower rate. Of course, depending on your precise circumstances this might be worth thinking about- maybe not having to make repayments will transform your lives in a way which means it makes sense for the estate to be paying over the odds for it. But in pure financial terms, all other things being equal, it's a bad deal. I am surprised that their advisor hasn't pointed this out.

If you want to understand the figures a bit, have a play with a compound interest calculator- will give you a (rough!) idea of what this sort of borrowing can cost.

www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

So, say your parents release £100k at a fixed rate of 4% They then live another 20 years. The size of the debt will now be £222k. People sometimes talk about ER as a rip off and that's not always right- it can be worthwhile in certain circumstances- but you can end up with a much larger debt than the sum borrowed simply because of the effects of compound interest over time.

It's incredibly kind of your parents but I would have some concerns- about whether it's actually beneficial to you (see my point about mortgages above), what the effects on your parents will be- how would the ER work if they wanted to move or needed to go into a care home? It also obviously reduces their options in the future, should their circumstances change.

I imagine the financial adviser is talking about retirement interest only mortgages, which are just like normal mortgages. So obviously you no longer own the chunk of equity you release but the interest rates you pay are same as normal afaik. It is different to equity release. (Disclaimer, I am not a financial advisor by any stretch).

I would imagine that these products will become quite popular with lots of ppl given recent housing booms and the late age of state pension kicks in in the UK

www.which.co.uk/money/mortgages-and-property/mortgages/types-of-mortgage/retirement-interest-only-mortgages-explained-a9z9k0h9lbfy

Deprivation of assets is only a concern if it was felt this was the intention. Ie its very clear that they either need care now or in the near future so the giving money away is a deliberate act to avoid higher care charges. It doesn't mean people can't gift money at all ever.

@sunshineforest He may be and a product like that is definitely less hair-raising than ER (obviously assuming the parents can make the interest payments with ease), but it's still not clear to me that this would be better than eg just giving the daughters a joint monthly sum equal to whatever the monthly interest would be. Depends on individual circumstances.

(I'm also not a financial advisor btw!)

I absolutely would not be advising someone for whom ‘security is very important’ to get into an equity release situation. The ‘rent’ they would effectively have to pay for the share of the house they no longer own will be a cause of endless anxiety as they age. And will certainly eat into the money available for care/inheritance later down the line.

In your situation I would happily accept any gifts from savings, or even a situation where they downsized to release equity but not this. Trading the security of home ownership in order to pay off your mortgage so you are secure is crazy. Same for home improvements.

Equity release is tipped as the next PPI scandal.