Could you find yourself house rich but cash poor in retirement? It’s not unusual. Your home may be worth a lot of money, but that won’t pay the bills.
Equity release can free up the wealth in your bricks and mortar, without having to sell up or move out. So how does it work, and are there risks?
If you’ve paid off your mortgage and are of a certain age, equity release in the form of a “lifetime mortgage” enables you to get a loan against the value of your house. Repayment can wait until your home is sold following your death or when you move out.
The amount you can borrow depends on your age – a 60-year-old may be able to borrow a lump sum of 15 per cent of their house value, while a 70-year-old can borrow 25 per cent, for example.
This kind of lump sum can be great for making retirement more comfortable, or to fund travel but, depending on your loan, interest may be accumulating all the time, increasing the debt.
With a “roll-up” lifetime mortgage, you don’t make any repayments but interest is mounting all the time. It is charged on what you have borrowed as well as the interest added from previous months – this is called ‘compound interest’.
The longer the loan lasts, and that’s typically until your house is eventually sold when you move out or die, the more will be owed.
Interest rates are also higher than a standard mortgage.
If a 60 year-old borrows €100,000 this way at a rate of 6 per cent, for example, they’ll owe €122,785 by the age 75, €165,645 at age 80 and €223,467 at age 85.
While you remain the legal owner of your property, your lender takes a “first charge” on it. That means they trump other beneficiaries when you die and have the right to take what they are owed from the proceeds of the sale of your home to pay off the debt.
As our example shows, interest added every month means the amount you must pay back can far exceed the amount you borrowed.
Who is doing it?
The typical customer is a single woman in her seventies, borrowing about €80,000, according to data from equity release provider Spry Finance.
Women live longer than men and have less valuable pensions, so it’s no wonder that living expenses in older age can be a challenge.
Single women were 2.5 times as likely as single men to choose equity release last year, according to Spry Finance customer data. Supplementing pension income, cash for emergencies and funding home improvements were the top reasons for lifetime mortgage equity release, it says.
The average loan to a single woman customer was €83,000, according to Spry, €6,000 more than the average loan to a single male (€77,000) and €20,000 less than those issued to joint applicants (€103,000).
The median property value for a borrower was €570,000 in Dublin and €370,000 outside the capital. The average age of customers was 72.
The upside of an equity release lifetime mortgage is you can raise cash while continuing to live in your home at a time when traditional mortgage providers will not look at you because you no longer have an income from work.
If you are short on money in later years and are not concerned about passing on the value of your home to your family or other beneficiaries on your death, it’s a solution.
The duration of the loan is tied to how long you remain in your home before selling. This could be when you move to a nursing home or when you die. The longer you remain in your home, the bigger the debt.
At the extreme, the amount you owe may slowly creep up to match the value of your home. There is a risk that when the house is sold, there may be no money left for other beneficiaries after paying back the loan.
Make sure you get a “no negative equity” guarantee, the Competition and Consumer Protection Commission (CCPC) warns. This means that you, your “estate” or your family are not left having to repay more than the proceeds of the sale of your home – even if the outstanding balance of your loan, including interest, is now more.
Spry Finance says its product guarantees that the amount outstanding will never exceed the value of the home.
An alternative to the roll-up product is an “interest-only” lifetime mortgage, where you pay interest on the loan every month at a fixed or variable rate. The advantage here is that the amount owed isn’t climbing all the time but you need to be sure that you can afford the repayments out of your pension income.
If your equity release mortgage has a variable interest rate, rising interest rates will increase the cost of your loan.
While it can be tempting to borrow a big amount against your home in case anything crops up in the future, the advice is not to borrow more than you need.
You’ll be charged interest on what you borrow and if some or all of that money is just sitting on deposit, you will be paying more in interest on the borrowings than you earn in a deposit account, warns the CCPC.
If there is a large amount to be repaid when your home is sold, there will be less available for your long-term care, or to pass on to anyone after your death – or possibly nothing.
So before looking at equity release, consider your longer term plans. Will you or your partner need the equity in your home later on to pay for nursing home care for example?
If you are considering equity release to pay for nursing home care, consider the HSE’s Fair Deal scheme first. This assesses your income and assets to calculate how much you can pay towards your nursing home care with the HSE paying the balance.
Under the Fair Deal scheme, you pay a 7.5 per cent contribution based on the value of your assets, including your home, and the contribution from your home is capped at three years regardless of how long you are in care. That means you can never be charged more than 22.5 per cent of the value of your home under Fair Deal, ensuring significant value remains in the asset.
The first €36,000 of your assets, or €72,000 for a couple, are not counted in assessment.
The contribution required from your home is normally met through an interest-free nursing home loan, which must be paid back to Revenue from your estate within 12 months of your death, or six months after your home is sold while you are still in care.
With some equity release lifetime mortgages, the lender may insist that the mortgage is paid off if you move out of your home, for any reason, for longer than six months. The mortgage may also prevent you making alterations to your property, including age-friendly alterations.
If you are short on cash in retirement, there are alternatives. You could consider selling your home and moving to a cheaper one, getting a different type of mortgage if you can meet the repayments, renting out a room for €14,000 in tax-free income each year, or transferring ownership to a family member in return for the cash and the right to live in the property for life.
Whatever you choose to do, make sure that you get independent legal advice.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
