Some questions on equity release

I was talking to a friend in work today - I came away from the conversation feeling very uncomfortable about what I think could be a major problem looking for my friend. In summary her parents opted for equity release about 5 years ago to free up about €120,000 on the €600,000 property (20% LTV). Shortly afterwards her father died and she lives with her mother in the house with 1 sibling who is married and lives elsehwere.

I'm not entirely sure how these schemes work so I'm hoping someone can correct me or validate my assumptions. The first is that the financial institution charges a rate of interest on the amount borrowed, ie. €120k @ say 6% p.a. = €214, 902 after 10 years.... is that a reasonable assumption?

Then, say the house after 10 years is worth say €500k (which is probably best case the way things have gone), and the mother passes away. Whereas the current scenario would have givien both siblings 40% each or 240k each (€600k-€120)=€480k. Now the likely scenario would be after 10 years (500k-215k), so they would have 28% each or 142k (500k-215k)=€285k.

I'd be grateful if someone could validate the assumptions above or correct me if I'm wrong. I seem to recall that these schemes were sold on the basis that if house prices kept rising the institution cleaned up by owning (in this case) 20% of a rising asset. However in a falling market I can't imagine the institution acception their 20% share drops in line with the market - is this correct?

Any advice would be appreciated because I would like to be able to provide some factual advice to my friend as I think she potentially has a major problem coming down the road.

Roy

First things first. Was that a "home reversion" or was it a lifetime mortgage?

If it was a home reversion, then the co. own a % of the house - they paid for a % of the house about 5 years ago and depending on the type of contract, they own the same, or a higher % of the house now.....more info here - http://www.itsyourmoney.ie/index.js...60&4nID=660&5nID=660&6nID=660&pID=660&nID=822

If it was a lifetime mortgage, your friend's parents took out a mortgage and the amount that is now owed has probably increased - more info here http://www.itsyourmoney.ie/index.js...60&5nID=660&6nID=660&7nID=660&pID=660&nID=821

When you say your friend may have a major problem coming down the road, what do you mean? The co. will have to get their money back when her mother dies/leaves the home....

Thank you MH for taking the time to respond - I appreciate it. Top be honest I'm not sure if it's a home reversion or was it a lifetime mortgage but I'll check it out.

"When you say your friend may have a major problem coming down the road, what do you mean? The co. will have to get their money back when her mother dies/leaves the home.... " Yes I understand that the co. will have to get their money back. The major problem I see for my friend is that she will have to probably take out a very large mortgage to stay in their own home ie. buying out the equity release company AND their sibling. This probably won't be possible so she will end up having to leave the family home.

Roy

Hi onekeano

If your friend's mother took out a home loan reversion, then your friend's problem is a lot less now than it would have been had prices not fallen. The Home Loan Reversion company still owns only 20% of the house and your sister will be able to buy it for a lot less.

However, it sounds to me like a life loan. There is no mystery about it. The mother had a house worth €600,000. She borrowed €120,000. At 6% that amounts to €210k.

Your friend's mother was rich 5 years ago. In 5 years' time, she will not be rich. Your friend will get a much lower inheritance and so will have to buy a smaller home.

Brendan

Hi, If the house was worth 600k when the life loan was drawn down 5 years ago and you think it might be worth 500k in another 5 years it seems to be you are not taking into account average fall in prices to date. We can't discuss fall in house prices in the future on AAM I am just making the point that your calculation is flawed as you cannot predict values. Yes your friend will have less inheritance but it's all relative since house prices have changed also. Also you say your friend will need to take out a very large mortgage to buy out the equity co and the sibling - but if the house is worth less and therefore the sibling's share is worth less then the mortgage your friend would need to take out has also dropped.

That's a very good point.

5 years ago, your friend's mother was worth €600,000 - the price of her house.

Today her house is worth €300,000 and she has a loan of €140,000. So her net assets now are only €160,000 - assuming her mother has spent the money.

However, I think, it is in your friend's interest for house prices to continue to fall, as it will be cheaper for her to buy the house. Against that, her share of the estate will be less.

Your friend should be concentrating on her mother's welfare and if her mother spends all her assets before she dies, then tough on your friend.