Lifeline or life sentence? How equity-release lifetime loans work

They may have been absent from the market for some time, but lifetime loans – a form of equity release – are back, offering older homeowners the opportunity of releasing part of the value of their homes without having to repay the loan until they die or sell the property.

Having stopped lending in 2012 in the wake of the last financial crisis, Seniors Money is ramping up a return to the market. It is the only player at present and is hoping, it says, to benefit from significant "pent up" demand.

But what are lifetime loans, what are they used for, and what are the potential pitfalls?

What is a lifetime loan?

In essence, lifetime loans are aimed at people who have paid off the mortgage on their home, so they are asset rich but possibly cash poor. A product such as this enables them to release cash flow from their asset by borrowing against it.

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For this reason, Steven Barrett, managing director of Bluewater Financial Planning, welcomes the return of the product for people who may have no other option.

“It’s a great facility for people whose only asset is their home, and who may only have a pension which may not be enough [for day-to-day expenses],” he says.

Lifetime loans differ from more mainstream equity release products in one crucial way; there are no repayments during the “lifetime” of the borrower. Instead, the loan must be repaid, with interest, when the homeowner either dies, or their property is sold.

There is no maximum lending age unlike traditional equity release products which are typically only possible up to the age of 70.

Seniors Money is currently the only lender offering such a product in the Irish market which it is selling through its new retail division, Spry Finance – launched "as a refreshment of the brand"– although Derek Handley, director with Spry Finance, expects that a player from the UK will likely enter the market at some point.

Seniors Money first started lending 15 years ago, with funds from Deutsche Bank, and is expecting sizeable demand for its lifetime loans, with Handley noting that over the past year it has had about 300 unsolicited inquiries from people asking about it.

Who can apply?

To apply for a loan, you must be at least 60 years of age (or the younger borrower if there are two of you), and you must be looking to release equity on a home of standard construction, located in the Republic.

The property must be worth at least €250,000 if it is in Dublin, or €175,000 elsewhere.

You don’t need an income, as no repayments are made during the term of the loan but, typically, applicants will be expected to own the property mortgage-free. The property must be your main residence, not a holiday home or investment property.

A key point is that should you borrow through a lifetime loan, you will remain the owner of the home and there will be no pressure at any time to leave it. However, your lender will take a “first charge” on it, which means that should you go to sell it, it has the right to take enough from the proceeds to pay off any loan or mortgage it has given you on it.

Why borrow?

According to the company, the most common reason for accessing lifetime loans is to fund works to the home to make it more comfortable, energy efficient or adapted to changing needs. After that, clearing small residual debts to free up monthly cashflow and funding specific care or medical expenses are among the variety of other purposes for which loans are typically used.

Another use is to offer adult children the opportunity to cash in on their inheritance early by releasing equity in the family home. But for Handley, it typically comes down to one thing: “The most fundamental reason is so that people can stay in their home.”

Making the right decision

Potential applicants need to consider such a decision carefully however.

“I would advise that the children should be included in this, and not because of inheritance but just to make sure that their parents understand exactly what it is they are considering or agreeing to,” says Barrett.

For this reason, Spry Finance requires each applicant to complete a mandatory consultation process before applying, to make sure that the product is suitable, and to ensure borrowers understood how the loan works.

And it won’t always be appropriate.

“It’s not suitable for someone who doesn’t have a financial need,” says Handley, adding that people should consider their other options before deciding upon a lifetime loan.

While he recommends children get involved in the process, he also adds a note of caution. “We would be very vigilant that parents aren’t taking out money to give to kids in any sort of coerced way. If we got a whiff of that, it wouldn’t go any further.”

How much can I get?

With Spry Finance/Seniors Money, the lowest amount you can borrow is €20,000 and the maximum €500,000, and it depends on both the value of the property and your age at the start of the loan. A typical loan would be €50,000-€80,000, Handley says.

For example, if you are 60, you can borrow 15 per cent of the value of the property but if you are 85 or older, you may borrow 40 per cent, so the share of the property you can borrow against increases with age. Where a couple applies, the age of the younger applicant is used.

This means, for example, that a 74 year-old single applicant with a home worth €525,000 can borrow up to €152,250.

What’s important to consider is the valuation Seniors Money puts on your your home, as this will determine how much equity you have to give up to get the loan.

Is it expensive?

A fixed rate of 5.5 per cent applies to loans from Seniors Money. While this may seem expensive in the context of current mortgage rates, where rates are as low as 2 per cent, a lifetime loan is a very different product in that the lender has no certainty as to when the loan will be repaid.

And with no repayments over the life of the loan, and interest compounded, such loans are undoubtedly expensive.

“But then the people who are availing of this are cash poor anyway and don’t want to be making repayments,” says Barrett, adding that while there may be other options, such as downsizing, this often doesn’t happen.

“Once people are past their 60s they don’t tend to downsize,” he says.

With a rate of 5.5 per cent for example, you could expect the loan balance to double in size after about 13 years. So someone borrowing €80,000 when they’re 72, will owe about €160,000 when they’re 85.

As that example shows, the costs of the loan add up significantly over time: and the longer you live, the more you – or your estate – will owe.

While it’s possible to end up losing the home in its entirety, there will be no further debt building up. Seniors Money says it applies a negative equity guarantee which means that the size of the loan is capped at the value of the home.

“The borrower will never owe more than the value of their home,” the lender says.

One way to reduce the cost of the loan is to repay it early; Seniors Money says you can repay 10 per cent of the original amount borrowed, without penalty, or the full amount can be repaid, without penalty, any time after 10 years.

Apart from the cost, there have also been some issues in the UK around lenders requiring a family to sell a home immediately after the owner’s death to settle the debt, but Seniors Money says it will wait for 12 months to call in the loan.

Other issues

Potential applicants may also need to consider the impact of the loan on their overall finances. Could it affect their eligibility for a non-contributory State pension for example?

Fair Deal – the State loan scheme to help pay nursing-home costs – should also be a consideration. According to the Health Service Executive, someone who has availed of a lifetime loan on their property may still apply for support through the scheme. However, the HSE will want to ensure that there is “sufficient equity” remaining in the home to enable it to recoup its loan, ie 22.5 per cent of its value.

In the case where a husband has entered a nursing home and has signed up the Fair Deal, the wife typically wouldn’t be able to apply for a lifetime loan as according to Handley, the company “would not ordinarily lend in a second charge situation”. However, it is something they would consider, depending on the individual’s circumstances.

Another possibility could be to use the lifetime loan funds to clear the HSE loan, Handley says.

Lifetime mortgage: How much will it cost?

Applicant's age: 74

Property value: €525,000

Loan: €80,000 (15 per cent of value of home)

Loan value at 79: €105,605

Loan value at 89: €182,865

Loan value at 99: €316,696

Value of estate at age 89: €523,716 (based on 2 per cent-plus annual price growth)

Value of estate at age 89: €342,217 (based on 0 per cent price growth)

Value of estate at age 89: €204,966 (based on -2 per cent price growth)

Source: Seniors Money