Personal real estate conundrum

[Simon Cragg]

I have a somewhat unusual personal real estate conundrum to solve. My parents are retired and live in a SFR in the UK which is free and clear. They currently have just enough income from pensions (401(k) equivalent and the state pension) to live. However, when my father dies his pension will be reduced so my mother will need some additional income. Also, the house is probably worth about GBP280K in its current state and would need another 30-50K to make it rent ready/sellable, with an ARV of about $350K. Unfortunately, it likely won't be possible for my mother to afford a smaller house following my father's death since most other areas nearby are more expensive than the one they are in and she wants to stay in the same town.

My parents are considering a reverse mortgage whereby the house is mortgaged to a lender who then will pay them a fixed amount per month until they both die, at which point the lender takes the property. They are in their early 80s so this seems like a very expensive way of releasing equity. I thought about putting myself in the shoes of the equity release lender but with more favorable terms, such as agreeing to pay them a fixed amount per month which attracts interest which is then secured against the property. So on their death I’d be paid out my principal and interest first and then any equity remaining would pass through their wills.

My biggest concern with that idea is I think I’d be subject to high rate income tax (not lower rate capital gains tax) on the interest when it’s repaid, and I don’t know of any way I could rollover or defer that gain.

I’m pretty sure I’m not the first person to come across this challenge, and I’d welcome any creative ideas as to how best to work it.

Cheers

Simon