Two months ago, no financial instrument was available for older people who wanted to realise some of the value of their home. Now there are two different offerings in the market that enable older homeowners to get access to a lump sum or extra income. One is offered by Bank of Ireland and the other is available from Residential Reversions Ltd.
So what is the difference between the two deals? One difference is that Bank of Ireland's product is available all over the Republic while the plan from Residential Reversions Ltd is only available in the greater Dublin area.
Bank of Ireland's Life Loan, which will be available from February, will give homeowners aged 65 or over a roll-up mortgage for up to 30 per cent of the value of their property. The money is repaid with interest when the borrower dies, or sells or vacates the property. The bank offers a 15-year fixed-interest term and the rate is expected to be around 7.5 per cent.
Residential Reversions's offering, the Homeowner's Extra Income Plan, is available from this week.
Qualifying homeowners aged 70 or over can sell a stake in their home to the company in return for a lump sum, a guaranteed monthly income, or a combination of both.
Bank of Ireland has limited its Life Loan offer to between £15,000 (€19,000) and £200,000. Residential Reversions deals with a minimum sum of £75,000 and a minimum stake of 25 per cent on properties worth £150,000 or more. The Homeowner's Extra Income Plan can be arranged for up to 100 per cent of the value of the house.
What's in it for the provider? Neither scheme will be profitable if the homeowner lives forever.
Residential Reversions is making a tradeable investment in the property market in the expectation that prices will go up. If the market takes a downward turn and the share is worth less, that is the investors' (i.e. the company making the loan) loss. Investors will not be able to realise the full return on their investment until the homeowner dies, sells or moves out. However, they would have the option of selling to another investor somewhere along the line.
Bank of Ireland will make its money from the interest on the loan. The longer the borrower lives or stays in the property, the more money the bank will make - up to a certain point. It is possible that the loan and interest could overtake the value of the house if the borrower lived for a long time. In such cases, Bank of Ireland has given a guarantee that it will shoulder any negative equity if it arises. In other words, the borrower will never owe more than the value of the house.
What's in it for homeowners? People who have little or no mortgage outstanding on their property could use either plan to bring about an improvement in their finances. In some cases, the money could be used to refurbish the residence or to cover some other large expense. It could act as a safety net for possible future nursing home expenses, or be gifted to children. The homeowners could also purchase some kind of lifetime annuity so that they would receive an extra monthly income or they could invest the lump sum in a number of different ways. This is a complex area and it would be essential for those intending to enter into such agreements to receive financial and legal advice.
If older homeowners are concerned about the inheritance value of their property, these plans may not be suitable.
Who is likely to avail of these options? Figures taken from the 1996 Census indicate that there were more than 375,000 persons aged 65 or over living in private households in the Republic of Ireland. Of this number, more than 255,000 were aged 70 or over and 150,000 were aged 75 or over. Generally speaking, over65s are a middle- to low-income group.
Many elderly people living on modest pensions have seen the value of their homes soar over the past decade but have been unable to benefit from their investment. Some of these people may be interested in borrowing against the value of their house or transferring a share of it. Financial institutions have shied away from these kinds of products in the past because of the perceived reluctance of Irish people to dilute their equity stake and the inheritance value of their property.
But some commentators believe there is a pent-up demand among older people and it may turn out to be common financial practice.
How does the Residential Reversions plan work? With the Homeowner Extra Income Plan, the homeowner transfers part of the value of their property to Residential Reversions. It is known in the UK as a home reversion scheme.
This will be a minimum 25 per cent of the value of the house to a value of at least £75,000. There is no maximum limit.
The percentage transferred to the company will be secured for the benefit of Residential Reversions by a legal deed. The company will buy the share of the property at a discount to market value, which would be about 50 per cent in the example given here for a couple aged 75.
The company has set up a panel of eight valuers and applicants for the plan will be charged a £120 valuation fee. Applicants are free to arrange a separate valuation.
Residential Reversions will take over the cost of the household insurance through a package it has arranged with Eagle Star. The company will monitor the condition of the property on an ongoing basis, making inspection visits every three to four years. The homeowner will either opt for a lump sum, a life income or a combination of both. The life income is funded and backed by an annuity policy but, in the way that it is channelled through Residential Reversions, it will be tax free.
All recurring payments and obligations will be managed through independent corporate trustees. Even if the homeowners have transferred 100 per cent of the property to Residential Reversions, they can continue to live in the house rent free for the rest of their lives or until they move out permanently.
The arrangement is transferable to another property, under certain conditions, if the homeowners move house.
Residential Reversions plans to trade its property investment, mostly to institutional investors. The homeowner will never have any dealings with the investors and will probably have no idea who owns the share in their home.
How will the Bank of Ireland Life Loan work? The Life Loan is applicable for homes valued from £60,000. There are four age bands, as shown in the table, and elderly homeowners can apply for a loan of up to 30 per cent of the value of their property.
The money is given at a fixed-interest rate for the first 15 years. At the end of this period, customers are offered a choice of either a new fixed rate or a variable rate.
In the normal course of events, no repayment is necessary until the property is sold or vacated by the owner, or the owner dies. When two people take out a Life Loan, the conditions apply to the surviving person. Bank of Ireland has received 2,500 enquiries to its branches since Life Loan was launched in October, and appointments and assessments will be arranged when the product becomes available.
