Q. My husband and I are happily retired for the last 10 years and, thankfully, remain in good health. We own our own home. We had always planned to supplement our pension with other income – we both play a bit of music, but we are losing a bit of enthusiasm for that. I have heard about ‘equity release’ to give us a bit of a buffer. Some of our friends have said that it is a great idea, others have warned us against it. Can you give me some advice?
Dear Reader,
These types of schemes are often very attractive for people in your position. The financing body – sometimes a bank – advance you a sum of money now. That is secured by way of a charge over your property. Often, no repayment is expected while you are both alive, and any sums due – both the original lump sum and interest – would be recouped from the sale of the property after you pass away.
The main disadvantage of schemes of this nature is the fact that the sums due can often balloon. The interest rate is always higher than a normal residential mortgage, but as no repayments are made the total owed can spiral.
If you borrowed €100,000 now, the sum owed after five years would be around €140,000. After 15 years, the sum owed would be near €265,000. If you are lucky enough to live for a further 20 years, your initial borrowing of €100,000 would have grown to over €500,000.
It is likely that any inheritance that you want to pass onto the family will be wiped out. These loans sometimes provide that the total owed cannot exceed the value of the home, but equally some provide that a shortfall should be taken from their other assets on death, for example savings, life insurance, or pension policies.
We should also note that should either of you need the assistance of the Nursing Home Support Scheme in the future, there would be certain aspects of that scheme that would not be available to them as there would be an existing charge on their property.
It is also important to note that often loans of this type include the ability for the bank to carry out maintenance works on the home, or to seek the sale of the home if it has been unoccupied for a period of time.
While the advantages to the scheme are clear, providing for a lump sum so that you can be comfortable, there are clearly serious disadvantages. The Law Society has confirmed that schemes such as this should be approached with care.
There may be other options open, depending on the family situation. Before taking any steps whatsoever, you should discuss same with your solicitor and financial advisor.
