To consider buying parents out of equity release

[Sonrien]

I've just found out my parents have taken out an equity release on their house.

It's for a really small amount but at a very high interest rate, which would see the proportion that the equity company own escalate from 1/5th now to pretty much all if it within 20 years. There's also a big early repayment penalty.

In principle I would like to help them get out of this so they can keep some house equity for future care/inheritance etc. However I'm also nervous to get involved in their crazy financial situation- they have no pension savings, believing the state pension will be fine - but are still spending all their income in their last few years of working- eg going on weekends away, cruises, buying a new car on HP etc.

I'm really not sure whether helping is an investment or a risk. (Aware there'd be legal advice needed and legal documents for buying a portion of house etc).

YANBU - help them if you can as you'll keep the house in the family

YABU - leave them to it - to much stress, risk and unpredictability

I just don't understand why so many people refuse to downsize?

We downsized and still have three young children - moved north to a smaller house and own it outright in our 40s.

I just don't get the 'need' for two people to have four bedrooms, two bathrooms, garden etc.

We have a two bed terrace with a yard and one bathroom. It's fine. Better than fine actually, we love it.

I think a lot of the time they can't face the upheaval, which is linked to people not having these discussions until it's too late.

It’s really difficult to find a suitable property. Bungalows are like unicorns where we live. We don’t want to live in a flat. Ideally we want a small house with a garden and a downstairs shower room or space to install one - they don’t exist. Many houses that would have been suitable once have big extensions and virtually no garden. So we’ll carry on living in the family home we love.

I just don't understand why so many people refuse to downsize

if you've lived all your lfe in a big house that you own why would you want to downgrade? We have a beautiful large 4 bed house where we brought up the children. Mortgage paid off years ago. I love the space and don't see why we should move to a cramped tiny house just because we are retired. We have room to have hobby rooms, guest rooms and different sitting rooms so we are not on top of each other. The garden is too big to manage but we pay someone. The only downside is that it's rural so no shops or bus service.
We have been looking for somewhere else for over a year. Not to downsize but to move somewhere with amenities you can walk to. It's very difficult to find anything nicer than we have. I look around the village and there are plenty of older people who manage. I think we will just adapt the house we have.

Agreed.
People need to make the move while they are fit enough to do it.
We've tried to raise the issue with ILs who are late 70s. But they aren't interested. They are fit and able now but no guarantee that will be the case in 5 years time.

I could have written this.

Equity release, which is a type of mortgage, can be transferred to a new property. My mum did it twice!

Well, if you can reasonably assume you'll be capable of managing, which includes being able to adequately heat the property to the temperature elderly people are likely to require as well as arranging necessary maintenance, you're not really the problem.

Did she do it via a bank, or an Equity Release company.

Doing it with a bank is probably much safer, than some of the companies who prey on vulnerable elderly people

My parents have done this, many years ago now. It’s sad as they worked hard for their home and they’ll have received a fraction of its value, but I wouldn’t bail them out of it even if I could. They still talk about the house being ours in future (me and my sibling) so they really don’t understand what they’ve done, and it’s certainly not the first appalling financial decision they’ve made, but they have capacity to make those poor decisions and I’m not throwing good money after bad.

This sounds like my DH and his mum.

He went over to hers one day because she’d called him up in a flood of tears about her debts and got his bank card out thinking it was just a couple of grand and he could pay it off for her. Nope it was 30k! It was all on trash too and she had nothing to show for any of it.

Anyway after a lot of time trying to help her with creditors he eventually convinced her to declare bankruptcy. However, once she’d worked through all that (they only gave her a minimum of 12 months and then discharged her from it) she started racking up the debts again. Now she’s in even worse and DH has had to wash his hands of it. She still has nothing to show for her spending other than a few nice clothes (most of which she never wears because she always buys 2 sizes too small because she says she can fit into it all once she’s used her new fancy gym membership 🤦‍♀️).

Some people just have a compulsion, I think.

The only way I would do this would be to ensure the property is then transferred to you in name once complete, so they can't release the equity again in the future. This obviously comes with other costs like stamp duty and legal fees, but would protect the house and protect your inheritance too (even though you'd be buying your own inheritance!)

i agree with @NeverDropYourMooncup . I think ER is the current equivalent of Endowment mortgages and PPI.

The Carol Vorderman ad gives me the rage as it’s so chirpy and misleading, but that could also be just that she annoys me too.

ER is going to mean fewer elderly people can fund their own care should they need it. Some may feel that’s fine as the tax payer will just have to provide social care, but in effect what they are doing is wasting their own children’s inheritance, if they have any, whilst also burdening their tax paying grand children with the bill for their care.

I do understand why many people stay put though; DH and I are early 60s and thinking of it, but the idea of wasting yet more money on stamp duty really puts me off.

OP I can help a little with the legal aspect of this.

If you wanted to buy your parents out of the equity release it would be a pretty simple legal process IF the equity release company are prepared to step aside, that could be a sticking point and they can simply refuse.

As it stands the ER company have a "First Charge" on the property at the land registry, that is the same arrangement a bank has on a house subject to a mortgage. It means that if the house is sold they are entitled to take the money owed to them first.

Fist Charges can only be removed by the organisation who applied them, so you would be looking to pay back the moneys owed to the ER firm, including interest and charges and for them to remove the charge, it is very important this is done - if they will allow you to repay they will remove the charge, but you need to check they have done it! (very easy land registry search)

Then in return for buying them out you would change the ownership of your parents home to tennents in common, with you as one of the owners. This safeguards your share, and allows it to grow with the market (as it is a % not a figure). At a future point, when the property is sold you get your money back.

You don't have to worry about your parents getting another ER loan behind your back, because it can't be done without your signature as all owners have to agree to a charging order.

If in the future your parents decide they want more money you can increase your % stake, up to 100% if it came to it and you want to do that.

It's all very normal stuff for solicitors, it needs to be done properly (ie use a solicitor to do the whole process).

The real issue will be if the ER firm are willing to stand aside, I suspect they won't, they don't have too (they advertise as whole of life mortgages) and they can look to absorb more and more of the value through interest alone.

It's insane to give them money to hand back to you as inheritance. I don't think there's anything wrong with spending all their money though if that is what they want to do, why should they save it to leave to you?

If they can’t get out of the ER scheme, I’d just leave them to it. Perhaps encourage them to do a funeral pre pay plan now so you’re not left with that responsibility.

Someone in my office did an ER equivalent for her parents. I think they transferred the whole house to her and she paid them a monthly sum to tide them over until pensions went into payment. Parents had a life interest in the property so entitled to live there until death. It might be too late for you to arrange this though.

If they've spent all that already whilst still working I'd not get involved at this stage as undoubtedly they'll run out again

People put off downsizing or adapting their homes for too long and then find it’s too late
equity release and a fool and their money are easily parted springs to mind

I can see it causing problems, if you did as I outlined and then they wanted more money they wouldn't be able to borrow any more as they wouldn't be able to get a loan on the house without your agreement - and therin would lie tension waiting to happen.

As it is they can take out more equity, until nothing is left.

We have upsized 😁

But with a view to making it better later on in life for us.

We have gone from a 3 bed house to a 4 bed house - but the main bedroom is downstairs with its own bathroom. So hubby and I effectively live in a bungalow. Son has his bedroom upstairs, and uses another bed room as a sitting room/hobby room - but could effectively live upstairs with a girlfriend if they couldn't afford to buy/rent their own place for a while, as the rooms are big and the main bathroom is upstairs. Hubby and I were aware of other elderly relatives on both sides of the family who refused to move until it became too late, so when this property came along we thought it would tick a lot of boxes for now and the future.

However with a mortgage you are actively trying to acquire a greater proportion of the house either by making mortgage repayments or price rises). With ER your share is decreasing every month whilst the value increases over time, you can't release any further funds and ultimately you're left with almost nothing.

It's madness.

I know someone (childless uncle/aunt) who did this but only took out a small amount 20k on a house worth about 750k apparently as they thought it was a good idea for home improvements 🙄
They seem to think it will double every 10-14 years (according to the documents) but they are late 70s/80s so think it will be ok if they do need care. They also think their house value will continue to rise and the ER company own a specific amount not a proportion. I am not entirely sure myself but I think these arrangements lack clarity.

My parents have done similar (lifetime mortgage but it's ER). Theirs is a 1/3 of the house value, in the paperwork it says they can move it to another house or pay it off. In theory the amount they owe increases to double the current amount over 26 years.
My parents asked if I was OK with it, I'm not sure what else I can say - I can't (and will not!) take on the remainder of their mortgage. They needed to retire and couldn't afford that whilst paying their mortgage. I've never expected anything in inheritance- it's their money not mine!.
If this helps them enjoy and live their retirement then who am I to stop them.

But in your case (and mine) no I wouldn't be risking my own finances.

There is no financial risk if its done properly and you are a tennant in common, you legally own a % of the house and that money is yours comewhat may, but I could see it causing a family feud, if say your parents spent all the money you provided, wanted more that you couldn't or wouldn't provide and then couldn't get another ER on the property - forcing them to sell, give you your % and possibly not have enough to buy and live.

In some ways its just better to let the ER policy eat it up and not have the agro.