Monday 9 February 2015

Reducing the Pain of Equity Release

Some 15 years or so ago my parents took out an equity release mortgage with Northern Rock. They inherited a large house when first married which they have lived in since and which they have always been adamant they never want to leave, but it's a very old building, difficult to heat and, at the time they took out the mortgage, needed a new roof and various other repairs. They borrowed a significant lump sum at an interest rate of 7.25%.

I have just seen the paperwork for the first time and was shocked to realise that the debt is going up at current rate of £11,000 per year. However, the debt doesn't have to be repaid until the house is sold and the theory is that house prices should rise at a rate that will compensate for the interest. It's difficult to be sure that this has been the case as the house is a bit of a "one-off" and difficult to value but I have used the Lloyds house price calculator  and it seems that they currently owe about 30% of the estimated value of the house.

I have been doing some reading around the subject as my parents have asked me to take a look at their more general financial situation and I have discovered that Northern Rock collapsed and the mortgage has been passed to Papilio UK who don't offer any new loans of this kind and don't even seem to be members of the Equity Release Council which is slightly worrying. My plan is to transfer the mortgage to another provider offering a lower interest rate (we could get 5.63% with Aviva) and hopefully release a little more equity which could be used to clear a (recently discovered) credit debt with an interest rate of over 18%.

Given my parents' situation they had few options available back then when the roof needed fixing as the only asset they had was the house. It made sense, and still does, to use that asset to give them the retirement they want, where they want it. I just need to help them do it as painlessly as possible.

Does anyone have experience of this type of mortgage or see any flaws in my plan?
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5 comments:

  1. weenie10 February 2015 at 22:07

    Hi Cerridwen, sounds like a decent plan to me, but in your shoes, I would probably seek some sort of independent advice, if only to confirm that what you have decided is the best course of action?

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    1. Cerridwen11 February 2015 at 21:08

      Hi weenie. Very sensible advice and hopeful I can at least talk to CAB or Age Concern about this. I'm reading up as much as I can but that isn't quite the same as actually talking to an expert. Thanks.

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  2. theFIREstarter11 February 2015 at 20:14

    I'm not going to be any help at all as I only heard of this type of mortgage when I read about it in the post!

    The fact that the debt is going UP each year sounds crazy to me but I don't think I understand it fully just yet.

    Surely there are better rates out there than 5.63%? Or is that also an ER mortgage and you cannot transfer it to a traditional one?

    Good luck with the plan, it sounds like a sensible one and definitely can't just leave it like it is!

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    1. Cerridwen11 February 2015 at 21:13

      Thanks TFS,
      The debt goes up because none of it is being paid off so the interest compounds at an alarming rate and yes, 5.63% does look to be the best we can get. It's sometimes called a "Lifetime Loan" rather than a mortgage, with the house being the guarantee.

      I will feel better once we get it transferred and hopefully get rid of the credit card debt at the same time.

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  3. loreun jeny29 March 2017 at 16:50

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