Equity release - tell me about it

[Jux]

DH threw me a curve ball this morning. He wants to do this to get 75K which he thinks will sort out the garden, bits of the house (windows particularly, problems in dd's bedroom etc), see dd through Uni (she's just finished GCSEs) and maybe give us a foreign holiday.

His dad did it on his house and said it's brilliant.

However, I had a friend (now dead) who did it and said it was awful. She struggled to get out of it and start again. I don't know what was so bad about it though.

I would be v grateful if someone knowledgeable could tell me a bit about it, and what I need to check and ask about it if we decide to go ahead.

We did it while switching mortgage and a renting out a property that we had a mortgage on. Load of cash released and new (much bigger) mortgage put in place, but still covered by rental
Income.

There's different types - what you would be doing is simply borrowing more on your mortgage. For example, house worth £200k. You have a mortgage of £75k, so you can remortgage to have some of the £125k equity as cash. You will still need to repay it monthly so your payments will go up.

The other sort is also known as a lifetime mortgage where an older person who owns their own home outright can borrow against the property value and won't have to make any repayments until their death, when the original amount borrowed and the interest accrued will be taken from the estate.

From the things you have said, a personal loan may be more appropriate - you will pay a huge amount of interest over the full mortgage term, it's an incredibly expensive way to buy a holiday when you think that you'll be paying it off for the next 25 years (or however long your mortgage term is).

We are lucky enough to own outright. The house is imo worth about 400K, though dh thinks it's worth 500K (bought for 360K 10yrs ago, in E Devon where prices haven't dropped much, if at all, over that period).

He wants to pay off a small personal loan which we only have a year, at most, left on anyway. He says the penalties for early finish are "minimal", but it seems silly to me to do it now. We don't have a huge amount of income, so he wants to get rid of monthly payments we are making: loan and credit cards are about it actually. The rest is wanted to do all the stuff to the house.

I should perhaps mention, that as I am disabled and finding it increasingly difficult to cope with stairs, I will need to live in a bungalow or flat long before I actually die!

You would need to do a remortgage and have monthly payments. Lifetime mortgages are generally for people at or approaching retirement age, otherwise the interest would spiral higher than the property value as it would be over a much longer period of time.

Is it worth looking into downsizing sooner to a bungalow or flat, that way you could free up some equity that way? Or taking a small, interest only mortgage on your home so monthly repayments would be minimal, and could be repaid when you do eventually sell up?

This sounds a bit odd. You have a relatively expensive house. You want to borrow a small amount for a few spurious things. You are proposing to in effect give the house away for a third of what it is worth. How old are you. What is the interest rate. You really do need to do the maths using excel or another spreadsheet to see how quickly and dramatically the interest rolls up. Are there any other financial factors involved. Have you been told everything. The better answer is to downsize. You need to pay for some proper independent advice before you sign anything. Sorry but I feel a bit concerned about this.

DH is 60 and I'm 57. We neither of us have regular income, unless you count my DLA.

Poppy, I completely agree that it's basically like giving the security of our house away, instead of simply downsizing. I have no idea what has brought this on. I did recently mutter, in response to dh going on and on about how he couldn't afford something or other, "better get a normal job then, and save up for it". He's not a saver-type - he's a musician, has quite a lot of work but it's not well paid and is uncertain and can be cancelled at a moment's notice.

I have no figures to put in a spreadsheet as yet. I've told him to check out all the figures and then show them to me and I'll think about it. He knows I don't want to do it.

I wonder what sort of musician. I digress. I only responded because a neighbour asked me a similar question. These loans are very very popular now especially among the affluent types to keep up appearances maybe. I looked at a loan building up at about 6.5% a year against various rates of house price increase normally around 5% to 10%. Its a gamble for the lender that the house exceed the lending over the period assumed. I think if I remember that the figures soon hit the millions but that is inflation for you. It is an awful idea which in specific circumstances my be a good idea for some people. It is not equity release it is a roll up interest loan coming with legal warnings. You have to do the maths or get somebody else to do them to see the mind boggling figures emerge. Best wishes.

Thanks, Poppy. What you say is as I expected, but I'll wait until he actually gives me some figures which aren't the product of his wishful imagination.

He is a guitar player and vocalist with several (not famous) bands, as well as a soloist. He has quite a lot of work, enough to keep us going, just! We're not anticipating fame and fortune here

Please be very, very careful.

You are either re-mortgaging £75K of your house, which you will have to pay back over a short period, with interest. e.g. repaying the capital and interest over the next 10 years

OR...

Your dh thinks he can take £75K and not pay it back until you die or move.

In the first option you will have monthly repayments much, much higher than your current loan repayments, and in the second option you risk compound interest being added to the £75K. This could so easily leave you in a position where you have little or no equity left in your house. My friend did this - took out £50K of equity (she was only 60) Within 10 years (with compound interest) the amount of her 'borrowing' had almost doubled. Another 10 years and she would have no equity left at all.

Please, be careful.

Thanks, Venus. This is what happened to the person I knew who had done it.

I think dh's dad, who thinks ER was the best thing he ever did, found it good as he needed money to help him nurse his dying wife; also he was in his 80s, so not so long to go for the interest to add up in. Mind you, he's still alive, 10 yrs later, but approaching 90 now. I imagine when he dies the house will belong to the ER company and they'll just take it. I think dh's sis is expecting a share (at least) and dh has this mad idea that dd will get something too. There'll be nothing.

I really, really don't want to do it. We are free at the moment, one year to go on the loan. A credit card.

There is a whole page on this in today's times. These are some brief excerpts.

"This is about elderly and vulnerable people being taken advantage of by big financial institutions that ought to know better. It's not human" said Castle 51.

The equity release council is chaired by Nigel Waterson a former Tory MP and shadow pension minister.

Many experts think these products should only be used as a last resort.

Thank you Poppy. I don't have the Times, but I'll see if I can find the article online. ER is becoming one of the last things I would ever want to do!

I'm no expert but my gut feeling is avoid at all costs. Something only to be done if you're struggling eating/heating and you accept there won't be any house left to leave your kids in a will. Not something to be done for home improvements and a holiday.

Good. Because you may well need to downsize in retirement to make up for the fall in real value of pensions maybe ten years down the line.

If you take the money now in a bad way that is to say an accumulating interest loan with no capital repayments you are losing the better option to sell and downsize later on when you might really need the money.

I would be absolutely ashamed of myself if I was promoting these schemes that prey on people's financial illiteracy. I couldn't look myself in the mirror. And that is why I am not an MP.

Equity release is what burglars do to you.

His reasons sound wonky to me ,op. Perhaps his plans are not exactly being fully revealed. I might do it if i wanted a large amount of $$ to abscond with myself.

You'd have to be mad to do that. Basically you are completely giving up control of your finances to an Equity Release Company. As others have said with compound interest the debt roughly doubles each decade. Why don't you bit the bullet in a year's time when the mortgage is paid off and just downshift, if you have mobility issues? Tell your husband that there's no such thing as a free lunch, particularly in the shark infested financial world.

Equity Release is NEVER A good deal for the homeowner