Q My friends retired to the coast 20 years ago. They are now in their late 80s and want to return to live near their daughter and two sons to benefit from their support.
The problem is that their current home on the coast is likely to sell for £400,000, but bungalows back near their family cost about £500,000.
Their daughter is debating options as to how she can help. Could she take out a mortgage (the home she owns outright is worth about £440,000) on her home or take an unsecured loan to make up the shortfall for her parents? Or can my friends get some sort of loan, or equity release or interest-only product that they can manage on a small pension? How can my friends make sure their daughter is repaid in the event of their death or if care home fees become due?
KS
A Judging by the number of emails I had over the years from one sibling (of several) being helped financially by parents or the other way round, unless all arrangements are made out in the open and with all interested parties involved, things can easily turn sour, not to mention bitter and resentful. And any arrangement where the lender – in this case, your friends’ daughter – needs to be paid back (even if eventually) can make added and unnecessary complications.
So in answer to your question as to whether there is a product your friends could use without having to get help from their children, yes, there is. According to Andy Vickery, a qualified equity release and mortgage adviser at Money Release who specialises in over-55s finance, they could take out an equity release mortgage. He says: “Cash from your current property, along with the equity you release from the new home [using the equity release mortgage], will give you enough to purchase your new home.”
So, using Money Release’s “equity release to purchase property” calculator, and assuming your friends would have £365,000 to put down as a deposit and the younger is 88 (after deducting – from the sale proceeds of £400,000 – estate agents’ and legal fees as well as the £25,000 they will have to pay in stamp duty land tax on the new property costing £500,000), they would need an equity release mortgage of £135,000 to complete the purchase.
The advantage of an equity release mortgage over a standard residential mortgage, such as the type the daughter could take out, is that no monthly repayments have to be made. That’s not to say that interest isn’t charged – it is – but the interest due is added to the amount originally borrowed, so the amount owed rises each year. If your friends’ pensions allow them to pay some interest – whether regularly or as the mood takes them – the overall amount owed rises more slowly.
Whatever your friends decide, Vickery says they should only go for an equity release scheme approved by the Equity Release Council.
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