“People should be very wary of anything that affects the equity in your house,” said Paul Murray of Age Action Ireland. “Which, the British consumer organisation magazine, made that point very strongly last week about equity-release products for older people,” he said.
The Irish equity-release market was shaken up last week, however, by the introduction of a new product from Sentinel, a dominant player in the Australian and New Zealand equity release markets, and IFG Group, an Irish finance firm. They say their product, the Seniors Money 60plus loan, is fairer and more flexible than the offerings on the market.
“This particular product really is completely reversible,” said Stephen Gunning, the Irish chief executive of Sentinel Europe. “If you as a borrower or your kids want to pay back all or part of it, you can do so without penalty.”
The Seniors Money 60plus loan enables homeowners to borrow between €20,000 and €500,000 against the equity in their home, depending on how much they need, their age and the value of their property.
Those aged 60 can borrow up to 15% of the value of their property and this threshold rises by 1% a year to a maximum of 45% at the age of 90.
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“The rules in relation to the percentage you can borrow are calculated actuarily,” said Gunning. “When you crunch numbers on it, for the average loan for the average person with an average house value, they should still own 50% of the equity in the house at the end of it.”
The competition
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IFG and Sentinel are the fourth providers of this type of product in the Irish market. The Seniors Money loan is in direct competition with a product from Bank of Ireland called Lifeloan, launched in 2001. Both are roll-up loans, meaning that the interest and capital to be repaid roll up over time until the house is sold or the borrower passes away or moves out permanently. No repayments need to be made in the interim.
The downside of roll-up loans is that the interest rates are much higher than on standard mortgages: the annualised percentage rate is 5.44% in the case of Seniors Money and 5.6% for the Lifeloan. Given the effect of compounding, the interest on the loan can really mount up in the long run.
The primary difference between the two roll-up products is that Lifeloan is a 15-year fixed mortgage and substantial penalties apply to borrowers who decide to pay off the loan within that time period.
Seniors Money loans can be paid off at any time. Seniors Money is also structured in such a way that borrowers can draw down smaller chunks of money over time, reducing the overall cost of borrowing.
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There are two other providers: Ship (Shared Home Investment Plan) and Residential Reversions. Both offer reversionary schemes, which entail selling a stake in your property for significantly less than its market value, depending on your age, health and marital status.
By selling a stake now, you miss out on the capital appreciation applicable to that stake between its sale and the eventual sale of the house.
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Proceed with caution
Rights campaigners for the elderly have largely welcomed the arrival of IFG and Sentinel to the market, but say the usual caveats apply. “The more competition in this market, the better,” said Murray. “The entry of IFG and the pending entry of other financial institutions should improve the products available.
“The IFG product is good in that you can get out at any stage without penalty and you haven’t sold a portion of the house but you still have to pay interest above the standard rate and it is compounding all the time. If you want to borrow €20,000, you should compare the cost with loans available from the rest of the market.”
Murray adds that retired people should always be wary of depleting their home equity, particularly as they may later need to draw on it to pay for nursing home fees or care at home. “I am not saying there is anything wrong with equity release and it can be very attractive for some people, but they should go in with their eyes wide open,” he said.
Eamon Donnelly, of the Retirement Planning Council, which runs classes in personal taxation, investment and pensions, agrees. “If you want to release capital from your home, these products can be a good way of doing that,” said Donnelly, “but, on our courses, we make a very strong plea to people to stand back from equity release and discuss it with their family, as what you are actually doing is giving away part of their future inheritance.”
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Those considering equity release should look at every eventuality before signing up, he says. Ensure you fully understand the cost of the borrowing and the extent to which interest can roll up over time. Examine the terms and conditions and find out if you can sub-let a room or take in a carer or invite anybody else to move in if your circumstances change at a later date.
With the reversionary schemes, ask if you can renovate or alter the property once a portion has been sold off and, if so, who bears the costs of this work. “These might all seem like small or unlikely issues now but they could matter greatly later on,” said Donnelly.
Investigate other options
If you do need additional funds to pay for home renovations, travel or medical bills, don’t leap headfirst into equity release without considering all the alternatives.
“Of the 3,000 people who go through our courses each year, equity release is certainly down the list of what they want to do,” Donnelly said. “They see it not as a first resort but as a third or fourth resort. The first resort would be downsizing and the next would be going to family or friends, cashing in insurance policies or selling off shares,” he said.
One of the most sensible options for older people is to trade down to a smaller property. By selling up and moving to an apartment or town house in the same area, they should be able to free up more than enough cash to boost their retirement income, while also benefiting from the lower maintenance burden of a smaller home.
If you would prefer not to move, renting out a room in your home might be a suitable alternative. You can earn €7,620 in annual rental income from a tenant as part of the Rent-a-Room scheme without having to pay tax on it.
Look to your children
Many elderly parents would prefer not to take in tenants and would like to keep their current home so that they can bequeath it to their children. Murray suggests swapping homes with a child now so that everybody can benefit and the property can be kept in the family.
“If your child has a three-bed house and you have a five-bed that they will inherit eventually anyway, why not do a deal with them? They could take your house now and give you the difference in value between the properties either as a lump sum or as regular payments over time,” he said.
If a swap is not a practical solution, there are other ways in which your adult children could help out. They could loan you money, which would ultimately end up as a debt in your estate, which they can inherit in any case.
They could give you a lump sum of up to €45,644 tax-free as there are gift tax exemptions between parents and children. Alternatively, they could supplement your income on a regular basis through a deed of covenant. They would be entitled to tax relief on the money they give you.
You could also opt for a private equity-release arrangement whereby your children buy a part of your property from you. Only half the usual stamp duty rate will apply and doing this would cut the children’s eventual inheritance tax liability.
If any of these options are plausible and appealing, ensure that both you and your children get independent legal and tax advice before proceeding as your individual circumstances may cause an increased gift tax or stamp duty liability or complicate inheritance matters.
It is also important to ensure that all property deeds are updated to reflect any ownership changes.