Equity Release Burden on ageing couple

by Readers Question

3 years ago

Equity Release Burden on ageing couple

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Equity Release Burden on ageing couple

Dear 118 Community, first of all, a happy and prosperous new year to you all.

One of our friends parents are in the following situation. They are an elderly married couple . He is 83 and in poor health, but just about managing on his own at home (this could change for the worse any week/month now).

His wife is 85 and very frail, shortly to be moved into a nursing home permanently (from her current hospital bed). She is also not deemed fit to be able to sign any legal documents. (No Power of Attorney in place). Their house is in joint names. One legal charge is on the title deeds, which is from the equity loan company. (Taken over twice since the original loan was taken out)

This elderly gentleman told me they had found this equity release company having come across their advert, as they were getting their car insurance from them at the time. This gentleman then rang the company; some forms were posted to them which they signed and sent back; and the loan was deposited into their account.

The original loan was for £74000 taken out in March 2007. The latest statement available to Dec 2013 shows an amount due of £111500 to repay the loan. Interest at 6.04% fixed is applied compound, which means their next statement is going to show around £118000 owed. They also have to sign an annual declaration next month that they still occupy their home. Once the gentlemen moves into full- time care, the equity loan company will want their money.

This couple have middle aged children.

Is there anything this family can do to prevent this loan snowballing month in/out?
Is there a chance the loan was not set up in accordance with the financial services guidelines in force at the time – sadly, this gentlemen says he got rid of the original paperwork he had, when he was informed the original lender had been taken over.
Would it be practical for a family member to be ‘given’ the house, on condition of paying off the loan without upsetting the tax man or setting up tax liabilities or other problems in the future? This angle with a view to provide a rental income for the elderly couple less the cost of servicing the loan.

Your considered advice would be really welcomed.

Kind Regards
Chris ageing

Comments

Neil Patterson

3 years ago

Hi Chris,

In 2007 Equity release loans on your main residence were still highly regulated involving a full fact find and reasons why letter along with recommendations for legal advice.

Also it is/was my understanding that the regulated and qualified sales person would normally involve children in the conversation so that they understood the implications.

Is it possible they don't remember this or could it be a mis-sold product?

Pam Thompson

3 years ago

I dont know much about equity release other than the fact it is a bad idea because of the high compounded interest added to the original amount released. I would think the only way out of this arrangement is to sell the property. Gifting a property will attract tax - 20% iht on gifting and then the gifter would have to survive 7 years to avoid a further tax bill on their estate. When gifting, if the owner remains in the property, this is classed as a gift with reservation - not great from a tax perspective. Good luck.

Puzzler

3 years ago

Regarding the absence of paper work, they could ask the equity release company for a copy or the solicitor who did the conveyancing. They should have been advised to get independent advice which they probably waived, do you know for what purpose they took this step?

As to snowballing that is the way these work, your friend could enquire as to how much a month they would have to pay to (a) maintain the capital owed at its current level or (b) to reduce it.

I think they would insist on redemption if the house was signed over so the family would have to buy it from the parents. If they can do that then they would have to pay (or later pay IHT on) the market value or proceeds. If that is an issue probably best leave as is, as the loan will be deducted.

How long ago was this loan taken out?

I don't know if it's necessary for children to be consulted - after all they have no claim until the parents die and the parents are entitled to do as they wish with their property. Whether it was the best thing for them is another issue.

Howard Reuben

3 years ago

Many equity release / lifetime mortgages were (and are) offered with the choice to either not pay any interest payments per month (added interest to the loan instead) or to pay as a 'normal' mortgage - however the purpose is to help release money from the bricks and mortar, enjoy retirement and not pay any monthly payments during the term.

The lender wants interest on their money of course, so the choice above is offered, and most people take the 'add to the loan' option. Nothing scandalous in my opinion as it gives the borrower an enhanced income (and lifestyle) for no reduction in cashflow.

Yes, children are always involved - unless they don't want to be. These type of mortgage arrangement carry a 'morality issue' too as the children may perceive they are being deprived of an inheritance as the increasing mortgage balance eats in to what they think they will receive upon their parents death. Add to this the requirement for a solicitor to also be involved (again, unless the borrower refuses this as well) and the lenders (and Advisers) are indeed offering as much upfront (pre-app) support as possible.

The lender will of course have copies of all sales documentation should the borrowers need to obtain them for their records.

On to how best to transfer the property and how to minimise tax - for this I would suggest that the family speaks to a tax adviser / accountant and also a property lawyer / conveyancer. Between them they will provide personalised specific advice to best suit their financial circumstances.

And of course if the family then needs a mortgage, my team would be happy to assist too.

Hope that helps.

3 years ago

Hi Chris

From what you have said it would appear that the homeowners almost certainly arranged their equity release 'directly' and without any face-to-face meeting. This being the case they received 'information' but NO ADVICE whatsoever and as such have no redress against the company involved.
ER specialists like myself would like to see 'direct' and distant ER applications made illegal and all ER applications to be face-to-face and fully advised only. And no children are not always involved but every effort should be made to convince the homeowners to do so.

One possible way to rid themselves of the increasing debt is to consider switching to a home reversion plan. Whether it will stack up economically will depend on the figures. The other way out is downsizing and paying off the debt.

They cannot sign the property over to their family without having to pay off the loan as the ER lender will take this as being the end of the contract.

Sorry to be all doom and gloom.

Garry

Puzzler

3 years ago

http://www.ageuk.org.uk/products/financial-products-and-services/equity-release/

The code of conduct is given here. It says the implications for their estate must be discussed with the clients - no mention of including children. Of course it is just a summary.

I would say that you can make a will without discussing it with any family or beneficiary so why would this be different? Also there is no certainty (in England, although not Scotland) that children would be the beneficiaries, so why should they be consulted?

Nick Pope

3 years ago

I carry out a number of regular (usually biennial) re-valuations of properties which are subject to equity release arrangements of various types. I won't comment on the advisability of taking money in this way but most of the elderly people I meet wish they had never done it.

Specifically I know of several who have not told their children of the arrangement despite being advised to by the provider. They are not however required to do so and I guess data protection rules apply. In the cases I know of the relationship between parent and child(ren) is strained.

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