Equity release to fund a roof and a grandson's deposit
Margaret, 74, owns her £380,000 home outright. Her income is State Pension plus a small annuity, about £16,800 a year, and she has £14,000 in savings. She wants £45,000 to replace the roof (£22,000) and give £20,000 to her grandson towards a house deposit. She has COPD and had a heart attack two years ago; her late husband handled all the finances and she is anxious about 'getting it wrong'. She is weighing a lifetime mortgage, a home reversion plan, a retirement interest-only mortgage, or selling and downsizing, which her daughter prefers. She does not currently claim Pension Credit. She wants the money 'before the winter' and asks whether she can take £45,000 at once and give some to her grandson later.
1. How should the adviser compare the options available to Margaret?
Read the worked answer
Establish the need first. £22,000 is a genuine, urgent repair. The £20,000 gift is discretionary and could be phased. Raising £45,000 now when £22,000 is needed means rolled-up interest accruing on money she does not yet require.
Lifetime mortgage. No monthly payments; interest rolls up. Check the rate (fixed or capped), the early repayment charge period, downsizing protection, the right to remain, and the Equity Release Council no negative equity guarantee. It preserves the home but erodes the estate.
Home reversion. She would sell a share of the property at a discount to market value (often a substantial discount) with no interest charged, but she gives up growth on that share and receives less than the proportional value; it is inflexible and hard to unwind.
Retirement interest-only mortgage. Requires monthly interest payments - roughly £225–£250 a month on £45,000 at current rates - from an income of £16,800. Affordability must be assessed and it may simply not be sustainable. It is the cheapest in total cost if affordable.
Downsizing. Releases capital with no debt, but incurs stamp duty, legal and moving costs, and the loss of a familiar home at 74; it is worth discussing, not dismissing, since her daughter prefers it.
Benefits. Check Pension Credit and Council Tax Reduction before and after, because any capital held counts as tariff income. On her income she may be just above the guarantee credit level, but the check must be done and recorded, and she should not be worse off as a result of the advice.
2. Would a drawdown lifetime mortgage or a single lump sum be more suitable, and what is the significance of her health?
Read the worked answer
Drawdown is generally the better structural fit. She takes £22,000 now for the roof, leaving a reserve facility for the gift later, so interest accrues only on what is drawn. On a rolled-up rate of about 6.5%, £45,000 taken today would roughly double to £90,000 in around eleven years; £22,000 would be around £44,000 over the same period, and less if the gift is never taken. Check whether the reserve is guaranteed and at what rate further advances are made - some plans fix the rate on the whole facility at outset, others price each advance later.
Health. COPD and a previous heart attack may qualify her for an enhanced plan, which offers a higher loan-to-value or a lower interest rate because of reduced life expectancy. That could be materially cheaper. The medical questions must be answered fully and accurately: non-disclosure can invalidate the plan or the enhanced terms, and the adviser must never complete the form for her or suggest what to leave out.
The gift. Giving £20,000 away and then needing means-tested care later can be treated as deliberate deprivation of assets, with the local authority assessing her as though she still held the money. She should keep a reserve for care and for unexpected repairs. The gift may also reduce her estate for inheritance tax, but that is a secondary consideration to her own security.
3. What procedural and capacity safeguards apply before completion?
Read the worked answer
Regulated advice and illustration. Equity release is a regulated mortgage contract; the firm must give a personal recommendation supported by a personalised illustration showing the rolled-up balance at intervals over the expected term, the effect on the estate, and the early repayment charges.
Independent legal advice. The lender and the Equity Release Council standards require the client to receive independent legal advice from a solicitor who is independent of the provider, and that advice should cover the legal effect, the impact on benefits and the effect on what she can leave to her family. Completion should not occur until that certificate is received.
Capacity and undue influence. Assume capacity unless there is reason to doubt it, but test understanding by asking her to explain the product back in her own words, without the daughter answering for her. The daughter's preference for downsizing must not override Margaret's wishes; family involvement is helpful only with Margaret's consent. If an attorney acts under a registered lasting power of attorney for property and financial affairs, the attorney must act in her best interests, evidence the registration and the lender's requirements, and it should be clear which capacity each person is signing in.
Conduct and records. Disclose fees and commission, record the alternatives considered and why they were rejected, confirm the right to remain and the complaints route, and diarise a review - and make sure she has independent contact details so she can raise concerns without relying on her daughter.