Question: My husband and I are close to signing papers for an equity-release policy. We have very small pensions and the money released from our home in a "lifetime mortgage" would give us about £23,000 cash – a lot of money to us. However, our children think we're making a terrible mistake as we'll run up huge debts (we're both in our early seventies). Are the children right? We think the debts will be manageable.
Answer: Equity-release schemes let owners tap into equity built up in your home – and turn it into cash. You can sell a portion of your house to an investment company at a huge discount – releasing £50,000, say, from a £250,000 property might cost you roughly half its future sale value – but retain the right to live in it until death. Alternatively, you can take out an expensive lifetime mortgage – usually costing 6 to 7 per cent – to be repaid at death or house sale.
The problems begin when there are family members due to inherit: in both scenarios, it's the children who tend to lose out financially. In your case, with a lifetime mortgage, you will borrow £23,000 based on your home's value and leave it to your children to repay it – plus accrued interest – when you die.
The debts aren't really your problem, it's more of a painful issue for your children – and be under no illusion, it is one huge financial headache. As a typical example, imagine a 65-year-old borrowing £20,000 at 6.5 per cent on their £120,000 home,who lives until they're 90. At this rate, the debts run up and payable at death would be around £100,000 – a colossal sum that must usually be paid for by the house sale. As a rough guide, the amount you owe will double every 11 years – so the longer you live, the greater the debt.
A spokesman for consumer group Which? says: "For many hit by plunging pensions, it might be tempting to release some much-needed money using your home. However, opting for an equity-release plan is a big decision and should not be taken lightly."
It's worth stressing that cash released from equity-release schemes can have a material effect on any means-tested benefits such as pension credit.
The solution is to sit down with your children and discuss it – no matter how tricky it may be to talk about money and death.
"It's understandable that your children might be concerned – especially if they haven't been involved in the decision-making process," says Andrea Rozario, director-general of equity release trade body Ship.
If you take a lifetime mortgage, make sure the provider is a member of Ship. This way, the amount of interest paid when you die will never be more than the value of your home.