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Original poster

Interest only equity release?

8 replies

HalfAwakeInAFakeEmpire · 15/08/2024 21:41

Specifically, the type where interest is fixed and paid monthly. Are there any drawbacks? Can it be used as basically an advance on inheritance?

MIL is thinking of doing this to helps us get on the property ladder. As much as I appreciate the thought, I’m quite freaked out by all I’ve read about the debt doubling within a decade and things like that. Obviously we don’t want to do anything that would disadvantage her, nor do we want to mess up the inheritance for her other children. The idea would be to get around 30k equity release for us to use as a house deposit. We would then pay the interest every month so it doesn’t add to the debt. I just don’t know if I’m understanding correctly that this is possible? It sounds like it from what I’m reading but if it was that easy why wouldn’t everyone do that rather than end up owing the entire value of their house? 😵‍💫

Details: MIL is 80. Her property is worth something in the region of 800k, possibly more. 4 children will inherit. Am I completely wrong thinking if we did this and paid the interest every month the debt would remain at 30k and upon her death my DH would inherit 1/4 of the estate minus the 30k, and his siblings would inherit 1/4 each?

Please correct me if I’m wrong, and explain it to me like I’m really dumb. It’s a lovely gesture from MIL and of course I’d love to buy a house but the whole putting her in debt thing makes me very uncomfortable!

OP posts:
Biggaybear · 16/08/2024 01:05

Ex equity release adviser here.

Yes, you are correct in your thinking. There are Equity Release schemes that allow you to make monthly repayments of the interest so that the original loan remains as it was. Most of these schemes also allow you to alter the monthly repayments (in case there comes a time you cant afford them), although if you stop them completely the interest rate charged could increase (but not by much....say 0.25%).

In your MIL case Equity Release COULD be a good idea seeing as the property is worth almost 30 times the amount being borrowed.

It is always recommended that ALL potential beneficiaries are aware of what is happening just in case one of them in the future think that MIL was co-erced in any way.

Shouldbeworkingnotreadingtalk · 16/08/2024 01:18

In theory you are correct. But. And it's a big but. The fees for arranging the mortgage can be much bigger than normal. .
Plus the penalties can be huge if you pay it off early. (Let's assume she passes on year 2 for example). That £30k (even with you paying the interest) could cost more like £45K if she dies year 2-6 into the policy.
So just go in checking all small print and with eyes wide open that the arrangement fees are at least £2-3k. (Usually).

OpizpuHeuvHiyo · 16/08/2024 01:32

This isn't really a good idea. Unless you lie to your mortgage lenders it won't do much to help you onto the property ladder.

If you lie and say this is a no-strings gift, and your mum is also prepared to commit fraud in writing to confirm this, then the 30k can be used as deposit and help you get approved.

If you are honest about the details, it will be factored into the calculations of what you can borrow as a second loan and will directly reduce what you can borrow.

Given the punitive fees mentioned by another poster, I wouldn't do this.

Would your mum consider downsizing to a £600k property and giving each child £50k outright as a no-strings gift? That would make a much better contribution.

Original poster
HalfAwakeInAFakeEmpire · 16/08/2024 08:25

Biggaybear · 16/08/2024 01:05

Ex equity release adviser here.

Yes, you are correct in your thinking. There are Equity Release schemes that allow you to make monthly repayments of the interest so that the original loan remains as it was. Most of these schemes also allow you to alter the monthly repayments (in case there comes a time you cant afford them), although if you stop them completely the interest rate charged could increase (but not by much....say 0.25%).

In your MIL case Equity Release COULD be a good idea seeing as the property is worth almost 30 times the amount being borrowed.

It is always recommended that ALL potential beneficiaries are aware of what is happening just in case one of them in the future think that MIL was co-erced in any way.

Thank you this is helpful. Does the interest amount stay fixed or increase over the years? I seemed to find examples of both, does it just depends on what you choose (presumably both with pros and cons)?

And yes all siblings would be aware if this went ahead!

OP posts:
Original poster
HalfAwakeInAFakeEmpire · 16/08/2024 08:26

Shouldbeworkingnotreadingtalk · 16/08/2024 01:18

In theory you are correct. But. And it's a big but. The fees for arranging the mortgage can be much bigger than normal. .
Plus the penalties can be huge if you pay it off early. (Let's assume she passes on year 2 for example). That £30k (even with you paying the interest) could cost more like £45K if she dies year 2-6 into the policy.
So just go in checking all small print and with eyes wide open that the arrangement fees are at least £2-3k. (Usually).

Thank you this is good to know. She’s in very good health but obviously at her age you never know, anything could happen really so it’s worth considering.

OP posts:
Original poster
HalfAwakeInAFakeEmpire · 16/08/2024 08:35

OpizpuHeuvHiyo · 16/08/2024 01:32

This isn't really a good idea. Unless you lie to your mortgage lenders it won't do much to help you onto the property ladder.

If you lie and say this is a no-strings gift, and your mum is also prepared to commit fraud in writing to confirm this, then the 30k can be used as deposit and help you get approved.

If you are honest about the details, it will be factored into the calculations of what you can borrow as a second loan and will directly reduce what you can borrow.

Given the punitive fees mentioned by another poster, I wouldn't do this.

Would your mum consider downsizing to a £600k property and giving each child £50k outright as a no-strings gift? That would make a much better contribution.

Definitely no intentions of lying or committing any fraud!

I never thought about it this way, so they would consider it as us taking out a loan for a deposit which is not allowed? Even though it’s technically MIL who would be doing it? Or do you mean they would consider us paying the interest for her as a monthly loan repayment? Or would they literally just take 30k out of the maximum amount they’d be willing to lend us for the mortgage?

If she was to downsize it would be to a much smaller property (more in the region of 300k probably) but understandably she doesn’t want to leave the family home where she’s lived for over 50 years. I don’t think it will happen until it becomes too much for her to manage even with help, and she’s thankfully very fit and well so I don’t expect that to happen anytime soon!

OP posts:
OpizpuHeuvHiyo · 16/08/2024 10:29

No they wouldn't just reduce the lending amount by £30k. They would reduce the amount of monthly payments they calculate you to be able to afford by the amount of monthly interest payments that you are committed to paying. If the interest rate on the equity loan is higher than the mortgage you will be taking the total effect of this would be to reduce the total purchase price of property you would be able to consider compared to if you bought without this "help"

The limits are there to help you to not get into unmanageable amounts of debt. Coming up with schemes to allow people to take on more debt than they can genuinely afford, which is what this idea is, is what leads to major financial crashes. It also ultimately helps drive up house prices if all the buyers are tying themselves in knots to borrow more and more rather than only offering what they can genuinely afford.

You might be able to find an unethical lender who will turn a blind eye to your situation and lend to you as if you didn't have this additional monthly commitment - but that won't make it a good idea.

Biggaybear · 16/08/2024 10:34

To answer some of your questions @HalfAwakeInAFakeEmpire and to debunk others......

Most ER loans are on a fixed rate basis for their entirety.

There are no early redemption penalties when MIL dies and you clear the £30k loan. Nor are there any if she had to go into a home & the house sold to pay for her care.

The gifting v repayment of the loan is on dodgy ground.....but I would say easily overcome with no lying involved. When someone gives you money for a deposit all lenders ask for the giftee to sign a form to say it's an outright gift & is not going to be repaid. The lender is not bothered where that deposit comes from (as long as its legal) and many many people remortgage or sell assets to give money to their kids.

In this case I would say it's quite legitimate for MIL to raise £30k by Equity Release & have her down as the one repaying the interest monthly. At 6% the monthly repayments are £150. After say 6 months if she felt that she couldnt continue these repayments there would be nothing stopping you taking them over by amending the direct debit.

HTH.

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