My parents are considering equity release...
Is it the right choice?
Equity release allows your parents to borrow against the value of their home while they continue to live in it. It’s a big commitment, so it’s only natural to worry about whether your parents are making the right decisions.
In this guide, we’re not focusing on the advantages and disadvantages of taking out an equity release product. Instead, it’s here to help you start a conversation with your parents, explain what equity release is, and answer some common questions – so you have a better understanding of what’s involved in the process.
Who’s eligible for equity release?
If your parents meet the following criteria, they could be eligible for equity release:
Aged 55 or over
Homeowner(s) with a property worth £70,000 or more
Remember – as with any financial product, it’s important to research first. Your parents will need to get the right equity release advice in order to understand whether it’s right for them. And you can ask them if you can attend the meetings with them if you wish to give them support.
What’s in this guide?
What is equity release – and how does it work?
Basically, equity release is a way for your parents to unlock tax-free cash from their home – without having to downsize to a smaller, cheaper property. A lifetime mortgage is the most popular type of equity release. Here’s a basic summary of how it works:
- A lifetime mortgage is a loan secured on a residential property
- This type of equity release unlocks some of the equity tied up in their home, while maintaining 100% ownership
- Your parents can choose to take a one-off lump sum, or a smaller amount upfront with the facility to borrow more in the future. Either way, the money will be tax-free
- The total amount your parents can borrow will depend on their age, health and the property value but not affordability
- There are no monthly repayments to worry about – interest is added to the loan amount each month or each year
- The loan plus interest is repaid to the equity release provider when the property is sold. This is typically when your parents die or leave their home permanently (for example, to go into long-term care)
A home reversion plan is another type of equity release. Read our article: What types of equity release plan are there?
What exactly is ‘equity’?
The equity in a home is the difference between the market value of the property and any outstanding mortgage (or other debt) secured against it. For example:
If your parents’ home is worth £350,000 and their mortgage is paid off, they would have £350,000 equity
If their home is worth £250,000 and they have an outstanding mortgage of £50,000, they would have £200,000 equity
Equity release allows homeowners to access some of this equity as a cash lump sum or in smaller amounts as and when needed.
Should I talk to my parents about it?
Whether it makes you feel worried to know that your parents are considering equity release, or you think it could be good for them, having an open and honest conversation is always a good idea.
It may not be easy to bring up the topic – especially if your parents usually like to keep their personal finances to themselves. But it’s important to understand their point of view before you tell them about your own thoughts and feelings.
Here’s how you could approach the subject with your parents:
First, ask your parents about their situation…
This will enable you to understand why they are considering equity release. Perhaps there’s something you don’t know about, or their circumstances have changed recently. This is your chance to find out about their situation.
Then, you can let them know how you feel…
If you have anything helpful to say, say it. If you’re concerned that they haven’t considered alternative options (for example, downsizing – or if they have savings they don’t know about). Just make sure you have all the facts first and do your best to try and see things from their point of view.
Ask if they’d like you to attend their meeting…
It can be helpful for both you and your parents to attend their meetings with an independent expert adviser. That way, everyone knows where they stand and has a clear picture of what’s going on.
Always remember, listening is just as important as talking
When you talk to your parents, try to be supportive – after all, the final decision is theirs. They’re to likely know much more about their financial situation than you do. Plus, it’s their house and they have the right to choose what they do with it.
Why do people choose equity release?
Today, more and more people are unlocking money from their homes with equity release. In fact, someone takes out an equity release plan every 15 minutes in the UK. If your parents are thinking of going down this route, here are a few reasons why they may be considering it:
These days, people tend to live much longer than previous generations. While this gives us more time to enjoy our later years, living longer can also put real strain on finances. Hard-earned retirement pots and pensions don’t always go as far you think – and your parents may need money for retirement to help them maintain their lifestyle when they stop working.
Over the years, house prices have risen dramatically in the UK. If your parents have owned their own home for a while, it’s likely that the value has gone up. However, because that additional value is tied up in their bricks and mortar, they won’t be able to feel the difference in their pockets (unless they sell their home and downsize to a smaller, cheaper property).
Equity release means your parents can unlock the equity (or cash) tied up in their property, without having to sell the home they love. They can access tax-free cash – either as a lump sum or smaller amounts of money, which would give them a regular income for their retirement.
Read our article: The pros and cons of equity release
How could equity release help my parents?
Everyone has their own reasons for taking out an equity release plan. And it could help your parents in many different ways.
If your parents still have a mortgage on their property, any money they unlock with equity release will go to pay this off first. That means they won’t have to worry about mortgage payments in retirement, and they’ll have a little extra money in their pockets each month.
After that, any money they release is theirs to spend as they wish – whether that’s making everyday life easier or financing things they’ve always wanted to do. Others may decide to give a living inheritance to their family, so they can see the joy it brings during their lifetime.
Here are just a few of ways that equity release could help your parents out.
A more comfortable retirement
Clear outstanding debts
Retire a little earlier than planned
Top up their regular income
Help the family
Help children get on the property ladder or set up a business
Pay education fees or living costs
Finance a wedding or other family events
Adapt their home to their needs as they get older
Fund care at home
Pay funeral costs
Pay medical or legal bills
Take regular holidays or the holiday of a lifetime
Fund leisure activities and hobbies
Treat themselves to something they’ve always wanted
Read our article: How can equity release help in retirement?
Is equity release right for my parents?
The decision to release equity from a property is a significant one. An independent expert adviser will help them decide whether this is the right way to finance their retirement plans – or whether another option could be better suited to their needs.
Here are a few questions you could ask your parents to make sure they’ve considered the alternatives:
- Do you have any savings or investments you could use?
- Could you move to a smaller, cheaper property? Just remember to take moving costs, fees and stamp duty into account
- If you only need a small amount of money, would an unsecured loan be easier? Could you borrow from a family member and repay them from your estate?
- If you still have a mortgage, is it possible to extend your mortgage term for a few more years? (This is likely to depend on your parents’ age)
- If you’re on a low income, have you checked what grants or benefits you may be entitled to?
Read our article: Could equity release be right for me?
Could I inherit my parents’ debt?
The simple answer is no, because there are measures in place to protect them. These days, all lifetime mortgage providers that are members of the Equity Release Council (ERC) must meet certain product standards – including the ‘no negative equity guarantee’. This is defined as follows:
The product must have a ‘no negative equity guarantee’. This means that when their property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to their provider, neither you nor your estate will be liable to pay any more.
In summary, this measure is designed to ensure that your parents could never end up owing more than the value of their own home (i.e. they could never go into negative equity). In turn, this means that you could never end up inheriting any debt as a result of their equity release plan.
When your parents pass away, and their home is sold to repay the loan, interest and any other relevant fees, any remaining equity over and above the loan would be paid to the estate – as per your parents’ will.
You’ll just need to inform the equity release provider of the change in circumstances, and they’ll talk you through the next steps.
Bear in mind…
Your parents must seek independent expert advice, so they understand exactly what the process involves and what fees they’ll need to pay. They’ll also assess their personal situation and advise them on the best way forward for them.
For extra reassurance, they should get a specialist solicitor to explain their legal obligations.
It’s wise to include the family in the decision. That way, everyone will understand how it works and how it affects them, especially in relation to inheritance.
Will equity release have an impact on my inheritance?
Yes, equity release will have an impact on your inheritance. Here’s why:
- With a lifetime mortgage, your parents will be borrowing against the value of their home
- When your parents pass away, the loan and the accumulated interest will need to be repaid through the sale of their property
- This means they cannot leave their property to their estate
- The sum of money they can leave will also be reduced – after the loan and interest are repaid, any money left over can go to the estate, as per your parents’ will
An independent expert adviser will discuss this with your parents. Most advisers will also be happy to speak to their family about the implications of equity release – or you can ask your parents to attend the meetings with them to provide support.
Your parents can still guarantee an inheritance
It’s a common myth that you can’t leave an inheritance if you have any equity release plan. But the truth is that your parents can guarantee an inheritance if they wish – by choosing to ringfence some of the value of their home.
In order to do this, they’ll need to choose an equity release plan with an inheritance protection guarantee. This enables them to protect a percentage of their home’s future value, which can be left as an inheritance after they pass away and the property is sold.
Is equity release safe?
As with any financial product, it’s important to make sure your parents do their research on equity release products and providers before making any final decisions. To support your parents, and for your peace of mind, it can be helpful for you to do some research, too.
This first thing to know is that today’s equity release market is fully regulated (and it has been since 2004). This means all equity release providers and advisers must be regulated and supervised by the Financial Conduct Authority (FCA) – so there is significant Government backed supervision and regulation in place.
For additional reassurance, there’s also the Equity Release Council (ERC) – a trade body whose members agree to abide by a code of conduct, and set out strict product standards in their Statement of Principles:
1. Interest rates must be fixed or capped
With lifetime mortgages, interest rates must be fixed. Or, if variable interest rates apply, there must be a ‘cap’ (or an upper limit) – which must be fixed for the duration of the loan.
2. You still own your own home
Your parents will have the right to stay in their property for life, or until they need to move into permanent care – as long as the property remains their main residence, and they stick to the terms and conditions of their contract.
3. You can still move house
If circumstances change, your parents will still have the flexibility to move house – as long as it’s a ‘suitable alternative property’ that meets the lending criteria of their equity release provider or they pay off their loan.
4. No negative equity guarantee
They could never owe more than the value of their home, so they could never leave you in debt. Even if the value of their property decreased and the money from the sale wasn’t enough to repay the plan, any remaining debt would just be written off.
Read our article: Is equity release safe?
Want to check if your chosen provider or adviser is an ERC member?
What happens if mum or dad dies?
Well, that depends on the type of equity release plan they have.
For joint equity release plans…
If your parents live together, or a parent lives with their partner, it’s usual for them take out a joint equity release plan (as long as both are eligible, of course). Here’s how it works:
- Both of them will be named on the agreement, and they’ll hold the equity release plan jointly
- If one of them passes away or moves into permanent care, the other person can stay living in the property – and the equity release plan won’t need to be repaid at this point
- The equity release provider will need to be notified of the change in circumstances. And at a difficult time, you may be in a better position to handle this than your mum or dad
When a sole named person dies…
Equity release plans can also be taken out in one name only. Usually, this is only a suitable option if your parent lives in their property alone. In this instance, here’s what happens when your parent passes away:
- You’ll need to inform the provider of the change in circumstances as soon as possible - you may be best placed to do this
- If your parent was single at the time equity release was arranged, and then married or found a new partner but didn’t add that person to the details of the plan, then that person may have to move out of the property. They won’t have a legal right to stay there – unless the equity release plan can be repaid in full
Where can I learn more about equity release?
Before you talk to your parents about equity release, it’s a good idea to learn as much as you can about it. Here are some helpful guides and resources to help you understand the ins and outs of equity release.
Important things to know
- While some plans may enable your parents to make provisions for the family when they’re gone, you may not be able to inherit their home or its full sale value
- Equity release will increase your parents’ income, which could disqualify them from certain means-tested benefits
- Your parents’ income could be adequately improved by checking whether they receive all the state benefits and grants they are entitled to
- There will be some legal proceedings to arrange, similar to when you buy or sell a house – so there will be some legal fees to pay
- Your parents could obtain similar amounts of money by selling their home and moving to a smaller one
- There may be an early repayment charge if your parents settle their lifetime mortgage early, the details of which will be explained by an independent expert adviser
- If equity release is not suitable for your parents, the independent expert adviser will tell them and suggest possible alternative solutions
Make sure your parents seek advice
If your parents are considering equity release, they can turn to The SunLife Over 55 Equity Release Service for independent expert advice that’s best suited to them. We can put them in touch with an independent expert adviser, who’ll talk them through all their options and help them decide whether equity release is the best option for them and if you can find a better deal your parents would receive £500.
Your parents may wish to include you in the decision and invite you to come along with them. Or you could ask to attend their meetings with them, so you can gain a full understanding of how equity release will affect your parents and you. Just remember to be supportive – your parents’ feelings and decisions about their financial future come first.