Equity Release to buy a boat

[Impaler]

I did... as a good friend says: “There’s nae pockets in a shroud”.

 

[Tranona]

I did... as a good friend says: “There’s nae pockets in a shroud”.

Well done that man! Life is for living, not worrying too much about what happens afterwards.

 

[GrahamM376]

As ever in this thread, a lot of the assumptions are based upon the poster’s own perception of the norm which may be very different from somebody considering equity release. To state that “most people would downsize more than £100k” assumes that most people are living in large homes and/or in expensive areas (eg SE England), and don’t need or want to stay close to families and friends. Big assumptions which do not apply in many cases.
And yes Tranoma is right there are big costs associated with downsizing, and possibly bigger ones relocating away from your local support

We downsized by more than £100k. Costs - estate agent when selling + solicitors for both selling and buying, removers, no stamp duty on purchase due to cash transaction - Total under £5k = 25% of Tranona's figure.

 

[jordanbasset]

We downsized by more than £100k. Costs - estate agent when selling + solicitors for both selling and buying, removers, no stamp duty on purchase due to cash transaction - Total under £5k = 25% of Tranona's figure.

Are you sure, I did not realise this made a difference, thought it was about the cost of the house itself, which I understand is 2% on anything over £125,000

 

[alant]

Well done that man! Life is for living, not worrying too much about what happens afterwards.

Good advice if you are single.

 

[RichardS]

We downsized by more than £100k. Costs - estate agent when selling + solicitors for both selling and buying, removers, no stamp duty on purchase due to cash transaction - Total under £5k = 25% of Tranona's figure.

Are you sure, I did not realise this made a difference, thought it was about the cost of the house itself, which I understand is 2% on anything over £125,000

I suspect he means that that a load of cash was transferred privately, over and above the documented purchase price of the house.

A great idea if everyone keeps silent and the taxman doesn't get a tip off or decides to investigate a suprisingly low purchase price.

If the taxman takes a look at the deal ............. then several people will be spending some quality time at Her Majety's Pleasure.

Richard

 

[pvb]

I suspect he means that that a load of cash was transferred privately, over and above the documented purchase price of the house.

If that's the case, it's strange that he said that solicitors were involved. I can't imagine many solicitors being happy to get involved in that sort of activity.

 

[bedouin]

Not a financial adviser.

Stamp duty £12k, Estate agency fees £7.5k, removals £2k, solicitors £1k - so over £20k lost before you look at doing anything to the new home.

Of course you can get away without spending a lot of money or trying to spend none at all, and you may be lucky and sell your house straight away and buy exactly what you want that needs no money spent on it, but life is not like that.

The choice is between hassle free borrowing and staying in your own home while still raising money to buy a discretionary purchase and only the individual can make up his mind which suits him. The straight money side is only part of the decision and all I am doing is pointing out the positive points of borrowing rather than changing houses. There are all sorts of permutations simply because of the wide range of variables involved.

£20K is somewhat less than the £50K you suggested earlier. But the real problem is that should you subsequently decide to downsize you have wasted a lot of money on unnecessary interest and so eroded your capital so much that you may not be able to downsize.

Once you have done Equity release your options are severely limited - if it is ever appropriate it can only be when you know you are never going to want to move house again.

 

[Tranona]

We downsized by more than £100k. Costs - estate agent when selling + solicitors for both selling and buying, removers, no stamp duty on purchase due to cash transaction - Total under £5k = 25% of Tranona's figure.

Not sure why something from the past involving sums of money quite different from those mentioned earlier should be relevant to today's environment.

The last move I made, which was to downsize, or rather move to a cheaper house so that it was mortgage free, cost just over £1000 in transaction costs - agent was a mate, did my own moving etc - all the things you can do when you are young and have no money - but is completely irrelevant as it was 35 years ago almost to the day.

The biggest slice of costs are transaction value related, so the higher the value houses involved the higher the cost. The amount of equity you are releasing is irrelevant.

It is these high costs and tight housing market that are making equity release more attractive for some and encouraging lenders to develop new products. If you were up to speed - just reading the money pages is enough - you will have seen all this.

 

[Tranona]

£20K is somewhat less than the £50K you suggested earlier. But the real problem is that should you subsequently decide to downsize you have wasted a lot of money on unnecessary interest and so eroded your capital so much that you may not be able to downsize.

Once you have done Equity release your options are severely limited - if it is ever appropriate it can only be when you know you are never going to want to move house again.

You forget that I included the possibility of needing to spend more than the straight transaction costs when downsizing. Remember theses schemes are aimed at older people who have shorter time horizons and do not want to move from their existing house - for all sorts of reasons, not all financial. So finding a cost effective way of using some of the equity in the house to enhance their last few years (which might include buying a boat!) is attractive.

Money paid out in interest is not wasted in the same way as paying out transaction costs. Expect you paid interest all your life to buy your house - was it wasted? House price growth rates exceed interest rates. That is part of the reason why some of us have ended up with house valued at levels that we could only have dreamed of in the past. It is also why some people now see their house as a financial asset to be used rather than an heirloom to be passed on to children.

You have clearly not seen the latest lifetime mortgage products that are coming on the market. They are very flexible. You can pay the interest as you go or have it rolled up, you can draw down money as you need it and make partial repayments as you go, and it is transferrable to another house if you do want to move All at today's relatively low interest rates. Very different from the old style reversion schemes which are rightly seen as not attractive.

So, I am not selling the idea - just pointing out that it is an option worth looking at if you are thinking of raising cash against your house while still living in it. As I said earlier, I do not expect to need to raise any cash this way, but would have no qualms about going down this route if it suited my circumstances at the time.

 

[bedouin]

You forget that I included the possibility of needing to spend more than the straight transaction costs when downsizing. Remember theses schemes are aimed at older people who have shorter time horizons and do not want to move from their existing house - for all sorts of reasons, not all financial. So finding a cost effective way of using some of the equity in the house to enhance their last few years (which might include buying a boat!) is attractive.

Money paid out in interest is not wasted in the same way as paying out transaction costs. Expect you paid interest all your life to buy your house - was it wasted? House price growth rates exceed interest rates. That is part of the reason why some of us have ended up with house valued at levels that we could only have dreamed of in the past. It is also why some people now see their house as a financial asset to be used rather than an heirloom to be passed on to children.

The trouble with your example was that you pushed the figures too much to try to make it look like a good deal - downsizing only £100K and having a mysterious additional £30K in costs that are certainly not essential.

The reason the money paid on interest is wasted is that it is being used to support you in a house that is bigger than you need. Unless you assume unrealistic levels of house price inflation you will be better downsizing now than waiting 10 years and paying the interest - hence what I am saying that it doesn't make sense unless you are sure you aren't going to move again.

So in the context of the OPs question it is hard to see any circumstances in which it makes sense to use Equity release (i.e. loan with no interest payments) to buy a boat.

 

[fisherman]

just as an aside, some people fondly imagine that the house they leave to their children will be kept, the 'old family home' etc. My children insist they will keep this one. The solicitor drawing up our wills said 'nonsense, they will sell, they always do'. See, each has a partner who has no emotional investment in the old place.

 

[GrahamM376]

Are you sure, I did not realise this made a difference, thought it was about the cost of the house itself, which I understand is 2% on anything over £125,000

Haven't a clue what duty threshold is now, IIRC it was £180k at the time (2009). We were lucky that a mutual friend put us in touch so the seller avoided estate agent fees which dropped the price and we agreed to split some items off the property price and pay cash separately for those - there are rules about that so care needed not to be silly with values. Anyway, the value was about £100 below stamp duty threshold.

 

[AntarcticPilot]

just as an aside, some people fondly imagine that the house they leave to their children will be kept, the 'old family home' etc. My children insist they will keep this one. The solicitor drawing up our wills said 'nonsense, they will sell, they always do'. See, each has a partner who has no emotional investment in the old place.

If leaving your estate to more than one beneficiary, the property will almost certainly HAVE to be sold, in order to provide the appropriate shares for each beneficiary. Otherwise, one beneficiary has to buy out the others. And, of course, if Estate Duty is payable, it may well have to be sold to meet the tax bill!

 

[lw395]

If leaving your estate to more than one beneficiary, the property will almost certainly HAVE to be sold, in order to provide the appropriate shares for each beneficiary. Otherwise, one beneficiary has to buy out the others. And, of course, if Estate Duty is payable, it may well have to be sold to meet the tax bill!

Not necessarily, I know someone who jointly inherited his parents' house with his sister. They decided to rent it out and share the income.

 

[AntarcticPilot]

Not necessarily, I know someone who jointly inherited his parents' house with his sister. They decided to rent it out and share the income.

We did that for a while after my mother died; for various reasons the property was unsaleable for several years. Of course, such arrangements can always be reached between beneficiaries, if they wish it. But ultimately it is likely that the value of the property will have to be realized; at worst when one of the original beneficiaries dies and their share of the house becomes part of their estate! And I know of one situation where the grandfather's property had to be sold to meet the calls on the estate, and one of the grandchildren then bought the house!

 

[Heckler]

There may be some good schemes out there but, remember they all exist to make as much money as possible in the long run for the lender. Equity release may be a good option for the coffin dodgers whose next move will be to the rest home or crem but, as my friends found out, borrowing on such a scheme too early in life can lead to such high compound interest that virtually no equity (or even none at all) is left when wanting to downsize after a few years to more suitable accommodation.

Nail on head!
Stu

 

[Tranona]

The trouble with your example was that you pushed the figures too much to try to make it look like a good deal - downsizing only £100K and having a mysterious additional £30K in costs that are certainly not essential.

The reason the money paid on interest is wasted is that it is being used to support you in a house that is bigger than you need. Unless you assume unrealistic levels of house price inflation you will be better downsizing now than waiting 10 years and paying the interest - hence what I am saying that it doesn't make sense unless you are sure you aren't going to move again.

So in the context of the OPs question it is hard to see any circumstances in which it makes sense to use Equity release (i.e. loan with no interest payments) to buy a boat.

You are mixing the qualitative aspects with the quantitative. It is irrelevant to the comparison of different ways of raising money. The choice about living in the same house or downsizing is far more complicated than you suggest and as I keep saying is nowhere near as easy or low cost as it might appear, particularly if you want to stay in the same area.

Interest is not "wasted". First compared with downsizing you may take several years for the lost transaction costs to equal the interest you are paying and second is (using current rates) less than the appreciation in the capital value of your house. This was not the case in the past with some schemes because the interest rate was significantly higher than average house price inflation.

Think about how you got the house in the first place. For most it was through borrowed money at an interest rate lower than long term inflation and rise in house prices. It is still the same now. A basic principle of finance - borrowing money at a cost lower than the return on the asset which you are buying maximises returns.

Of course boats are not normally appreciating assets but provide value to the owner in different ways. Some people do not value them highly enough to borrow money to buy one, but others do. So while your last sentence may be your view, it is not a statement that can be generalised to others. There are clearly people who are prepared to reduce the value of their assets held in their house and instead put it into a boat. Downsizing is one way and equity release is another. They both have their pros and cons, and all I am saying is that equity release has in recent times become more attractive.

It is not just me saying this. The increasing number of flexible products on offer, the reduction in typical interest rates and the growth in the number of people, and the amounts of money raised all tell the same story. There are many other factors at work also driving this such as increased healthy lifespans, changing attitudes to house assets, pressure to pass money down while still alive, IHT changes, changed pension rules etc.

There is usually no constraint on how the money is used, but I guess buying a boat (like the mythical yellow Lambo) does not feature in many plans but no reason why it should not. If, like me, you are in your 70s and can see being able to use a boat then borrowing against a house while still living in it, knowing that it will reduce the value of your house when you are dead does not seem daft at all. After all extending mortgages to buy a boat was a common strategy 15-20 years ago. That is how I bought my first new boat. The only difference is that I paid the interest out of earnings, whereas now it might be paid out of my estate.

So not hard to see circumstances where it makes sense, although it is easier to see circumstances where it would not be a good idea.

 

[Tranona]

Nail on head!
Stu

But sensible people who understand the subject don't do that. The only value in looking at what happened to other people is helping understand the consequences. However, if your circumstances are different and what is on offer is different, then past experience of others is hardly relevant.

 

[fisherman]

Has a second hand boat of a certain age, with a 'badge' reached a base value, which with upkeep can be maintained? If so surely one would use the house as security against a loan for a boat. Money is only a tool which is taken down from the shelf, hired, and put back. If maintenance is not affordable then neither is the boat.