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My parents want to do equity release: What are the risks and what if they need to pay for care?


My parents have told me they are considering using equity release to access some of the cash tied up in their home, and I have some concerns.

My first issue is that they are not particularly good with money. Some years ago, they ran into trouble with their previous interest-only mortgage as they didn’t have the funds to repay it when the term ended.

In the end they bought a much cheaper house, selling their previous place and buying outright with the small profit. Given what happened, they are lucky to own a home at all.

My parents are in their 70s and on the state pension. They say they want to use equity release to carry out some renovations on their home, which I don’t think are strictly necessary, and plan to spend some money on a holiday.

Concerns: This reader’s parents are planning on using equity release to tap the cash tied up in their home – but she is worried about the impact it could have on their future finances 

They say they can choose to pay monthly instalments to clear some of the equity release loan, but in reality, I don’t think they will. As I understand it that means the whole amount will need to be paid back from the sale of their home when they die, with interest.

My parents don’t have much in the way of savings, so if they ever needed to go into care, their home would need to be sold to pay for that – and I am worried this equity release mortgage could be a spanner in the works.

I don’t know a lot about equity release, but given their financial history I don’t think it’s a good idea. Am I right to be concerned about this, and what alternatives do they have? Anon, via email

Helen Crane of This is Money replies: This is a very tricky situation. On the one hand, you want to protect your parents from making a bad financial decision, which your email suggests is something they might be particularly vulnerable to.

But on the other, it is your parents’ home to do with as they wish. Regardless of money mistakes they may have made in the past, they might not appreciate their grown-up daughter getting involved in their affairs.

You are worried, however, that their decision to use equity release – if they do go ahead – could have implications for paying for care, should they need it, further down the line.

Equity release, also known as a lifetime mortgage, is when a homeowner or couple aged 55 or over take out a loan comprising up to 60 per cent of the value of their home. 

Rolling up: Compound interest on equity release loans means that some customers pay back far more than they borrowed

Rolling up: Compound interest on equity release loans means that some customers pay back far more than they borrowed

They continue to live there and remain the sole owners. The loan is then paid back from the sale of their home after they die or go into long-term care, with interest added on. 

The interest that accrues is added to the balance of the loan – known as compound interest – so depending on how long your parents live, and the size of the loan they take, the interest could add up to tens of thousands of pounds. 

You are worried that, if the loan against their home meant that they did not have enough money left to pay for care in future, you might be asked to, or feel pressured to, help them out financially.

You haven’t told me whether this is something you or other family members have the means to do, or would be willing to do.

However, I can understand that it would be frustrating to either be asked to contribute to your parents’ care, or to stand by and watch them struggle if you couldn’t pay, when they had used the money released from their home on renovations and holidays.

You admit that you don’t know much about equity release, although I suspect you may have heard some horror stories about interest piling up to more than the house was ever worth, or homeowners falling into negative equity and their children being forced to foot the bill after they died.

On the whole, equity release mortgages have greater protections in place today than they did in the past – but it can still be a very expensive way to borrow money and there are risks that your parents need to be aware of.

I asked two financial advisers to explain how equity release works, whether your concerns about the cost of care are valid, and what advice they would give your parents.

Downsized: The parents have already moved to a smaller home - one of the options that financial advisers usually suggest as an alternative to equity release

Downsized: The parents have already moved to a smaller home – one of the options that financial advisers usually suggest as an alternative to equity release

Is equity release right for them? 

Chris Wheeler, financial adviser at MPA Financial Management, replies: It sounds as if this couple are borrowing money to do some of the nice things in life. 

It’s their money, and they can do what they like with it, but their daughter has pointed out that they have not historically been good with money. They previously went with an interest-only mortgage and never sorted out the repayments, which is not an uncommon occurrence.

With equity release, I would want to see mum and dad have a conversation with the whole family to see what their thoughts and feelings are. If they proceed with the mortgage and they spend all of the capital, they are left with this debt on the house.

 Generally when working with customers in later life, I see equity release as a last resort

They should also be aware that equity release can come with lots of set-up fees, such as mortgage arrangement fees, broker fees and legal advice. It’s not a quick and easy way to get money.

If you just need some money in the short term, it’s not necessarily the best way to go.

Nicola Crosbie, chartered financial planner at Moran Wealth Management, replies: Generally when working with customers in later life, I see equity release as a last resort. 

If they do really need the money, though, it doesn’t seem like this couple have got many other options. They have already downsized, which is one of the main alternatives I would usually suggest.

What are the other options?

Chris Wheeler: Before they decide on equity release, they need to look at all of the other options.

A good first step would be to check their entitlement to state benefits. They could chat with Citizens Advice or Entitled To and see if there is anything additional they could be claiming. A little bit of extra income might help them to achieve what they want without getting into debt.

Benefit check: Wheeler suggests contacting Citizens Advice to find out whether there is any additional financial help available

Benefit check: Wheeler suggests contacting Citizens Advice to find out whether there is any additional financial help available

Alternatively, if she were willing or able to, the daughter could offer to loan them the money at a lower rate of interest, or none.

That way, she could retain an element of control, and stop her parents being beholden to a third party. This could also allow for the house to stay within the family, or be sold to recoup the money lent, after the parents passed away.

Nicola Crosbie: They might also be able to borrow from a conventional lender such as a bank, but they would have to ask themselves whether they would be able to afford the repayments considering they are on the state pension.

What if they took only a small amount of equity?

Chris Wheeler: If they are determined to go ahead with equity release, I would advise them to keep the amount as small as possible and keep the interest to a minimum.

But even if they only release a small proportion of the value of their home, the interest still rolls up.

The rates on equity release mortgages are typically around 4 per cent to 7 per cent per year. Even if you only borrow a small amount, that debt will double within 15 years.

If they borrowed £50,000, then within 15 years that holiday and work on their house would effectively have cost them £100,000.

>> You can see the rates available on equity release mortgages using This is Money and Age Partnership+’s new tool 

How would it affect the cost of care? 

Chris Wheeler: The daughter’s concern about care fees is a valid point, and another reason why I would advise this couple to proceed with caution. 

The cost of private residential care can be as much as £1,000 per week, and that will increase by 8 or 9 per cent each year without fail.

That said, this couple may not end up going into care. Most people I speak to about later life tend to assume that they will end up in a residential care home, but the chances of that are actually somewhere between one in four and one in six.

People will often need a helping hand around the home, though, and there are costs associated with that too.

Care costs: Depending on whether one or both partners go into care, and what other assets they have, the equity release loan could affect their eligibility for fees support

Care costs: Depending on whether one or both partners go into care, and what other assets they have, the equity release loan could affect their eligibility for fees support

Those who have assets, such as savings or investments, of less than £23,250 are usually eligible for help from their local council with the cost of care. This will rise to £100,000 from October 2023. 

When the first person in a couple goes into residential care, the value of their property is disregarded for assessment purposes if it is still the other person’s permanent home. 

But if both partners went into care, or one went into care after the other had died, the equity remaining in the home could be taken into account. 

It would also need to be sold within 12 months of that happening under the terms of most equity release agreements. 

Whether the money left over from the sale of the home would be enough to pay for care fees would depend on the cost of care, the value of the home, how much equity had been taken out, and how much interest had accrued.

Helen Crane of This is Money adds: When it comes to a local council means testing for care fees, there are a couple of issues that might crop up due to equity release – though the specifics depend on the local authority’s own policies. 

If you had a substantial amount from your original equity release lump sum in your bank account, this could be counted as assets meaning that you would have to contribute more to your care. 

But at the same time, the fact that you had taken equity out of your property could mean that you are viewed as having a lower level of assets, and could therefore contribute less. 

Taking out an equity release plan shortly before a care assessment could also arouse suspicion, as you may be viewed as having tried to cheat the system. 

In this scenario, some councils might decide to ignore the amount of equity released and assess you based on your home’s original value. 

There are other options to potentially fund care in later life, for example renting out the home when you can no longer live in it, or agreeing a deferred payment scheme with your council. 

Solid advice: Those considering equity release are recommended to seek out an adviser who is part of industry body, the Equity Release Council

Solid advice: Those considering equity release are recommended to seek out an adviser who is part of industry body, the Equity Release Council

What is a good equity release plan?

Chris Wheeler:  If the parents do decide to go down the equity release route, they should only use advisors and loan providers that are part of the Equity Release Council. This is an industry body that works to improve the standard of products and advice.

In terms of policy features, some lifetime mortgages offer drawdown. This is when there is a portion of the loan in reserve, which you don’t pay interest on until you choose to access it or ‘draw it down’ – almost like an overdraft.

That might be an option – but having a drawdown facility will usually make the rate on the portion of the loan you are paying interest on higher.

They should also make sure they have the option to port the mortgage to a different property in case they need to move.

Nicola Crosbie: There are some equity release plans which allow you to pay off the interest on the equity release loan as you go.

This could cut down the total bill – but is unlikely that this couple would be accepted for any plan with mandatory regular payments, given their history of credit.

Perhaps what they would want is a plan where interest payments are possible, but optional. They could make payments when they could afford to do so, but the house wouldn’t be repossessed if the interest wasn’t paid every month. 

They should also seek to fix the interest rate for the term to have certainty about how much they will owe. Most equity release mortgages on offer today are fixed rates. 

I would also look out for a no negative equity guarantee. This means that the mortgage debt will never be more than the price of the house. 

It means the lender can’t come back to the family and ask for more money, or take it from the policy holder’s estate. However, having that benefit means the interest rate paid on the loan might be higher.

Family values: Crosbie advises including family members in discussions about equity release, so that everyone gets a chance to voice their concerns

Family values: Crosbie advises including family members in discussions about equity release, so that everyone gets a chance to voice their concerns 

What other advice would you give this couple?  

Nicola Crosbie: If they do pursue equity release, they should include their family in the meetings so they can go through their concerns. A good equity release adviser will suggest this.

It is good for the family to ask questions, because sometimes the homeowners might not fully understand it themselves.

They need to have a full understanding of the product – the pitfalls and the pros and cons.

I would also urge this couple to only borrow what they absolutely need, in order to cut down that interest, and be mindful of any fees.

Helen Crane of This is Money replies: It is clear from the experts’ advice that an equity release mortgage is not something your parents should take lightly. 

I would suggest that they carefully consider how much they need this money. Compound interest means the borrowing can get very expensive, and it would impact any inheritance they planned to leave behind. 

One of the issues with equity release is that it is impossible to predict the final cost of the borrowing. 

No-one knows how long they are going to live after they take the loan out, and how much interest will accrue. 

One key protection to look out for is that negative equity guarantee, which will at least give the assurance that your parents won’t owe more than their home is worth.

When your parents get older, the loan could potentially affect their ability to pay for care – but it depends on the exact circumstances. 

I would encourage them to contact their local council and check their current eligibility for help with the cost of care, and whether that would be affected if they used equity release. 

Finally, one of the other options suggested by the experts was for you to loan your parents the money. 

While this would circumvent your concerns about equity release, it is a big ask. Don’t do it unless you can afford it and feel comfortable with it. 

If you decided to do so, I would suggest you get legal advice on how to ensure that you recoup any money you lend from the eventual sale of your parents’ house – especially if you are not the only child. 

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