1st October 2015

Equity release conundrum?

Is equity release really a good option? 

Many clients who feel they will need to pay for care may consider future funding through equity release schemes but what does that achieve if care is required? 

If the borrowers are a couple, it means any amounts languishing in their bank accounts when care needs are assessed will be classed as savings and would need to be used to pay the full cost of care should one of them need care. That seems absolutely barmy because the property in that instance would be disregarded anyway and even if it was a sole ownership there would still be a 12 week disregard.

If all the equity release funds are swallowed up by person A who then dies, then person B needs care there is nothing left in the kitty to pay care fees and as the equity release provider has a first charge over the property a local authority will not be able to offer a deferred payment agreement [DPA] to fund care costs.

The only option would be to sell the property pay off the equity release provider which charges a higher rate of interest that local authorities do for DPA's. Usually property sold to pay care costs or after probate sells for 20% or more below the market value meaning there may be insufficient to fund care costs for the duration anyway. Look at the maths.

Property value £150,000 for example

Equity release £ 70,000 perhaps

Share each £ 35,000

If care costs are £800 per week the £35,000 will run out after 43 weeks.

Although there is no legal requirement to do so frequently if one party has saving they will continue to pay care fees until they are exhausted, in this instance after about 87 weeks.

If no equity release had been taken the property value would have been disregarded totally.

If after the first death the survivor needs care no deferred payment agreement can be offered because of the first charge so the property must be sold. If values have remained constant and at that time the equity release is owed £90,000 for example, if the property achieves 80% of its market value, which is likely the maths are: 

80% value £120,000

Equity release owed £ 90,000

Amount available for care £ 30,000

After 8.4 weeks at £800 per week they funds [allowing for the upper threshold] would be exhausted and the survivor moved to a home funded at local authority agreed rates unless top ups can be arranged. 

Another downside is if gifts of lump sums are made to family etc from the equity release funds they may fall under the asset deprivation rules passing bills for care to the beneficiaries of those gifts, enforceable through the courts. [Annexes B,C,D & E Care Act 2014 pages 397-454.

Rachel Cope

‪Legal consultant and author of Protecting Assets from Wrongly Being Used for Care Costs‬

Retirement