Equity release mortgages

Why would you use equity release?

Equity release schemes are not suitable for everyone, but they may be worth considering if you need to raise a lump sum, or you need a regular income for your retirement and you:

• don’t want to sell your home and live elsewhere and
• are not concerned about passing on the value of your home to your family or other beneficiaries on your death

Don’t be tempted to use an equity release scheme to raise money for investments that may be risky. You could lose some or all of your investment and any return you make on your investment is likely to be less than the cost of the equity release scheme.

One reason you may be considering equity release is to pay for nursing home care. If this is the case, you may also want to consider the Health Service Executive Nursing Home Support Scheme, which allows you to receive state benefit which you repay when your estate is settled. For more information on this scheme, contact the Department of Health or the Health Service Executive. You can find more information about moving to a nursing home here.

A small number of firms offer equity release schemes. Always check that the firm you deal with is regulated by the Central Bank. From 1 June 2008, all firms in Ireland that provide lifetime mortgages or home reversion schemes must meet the conditions of the Central Bank’s Consumer Protection Code and must tell you about the costs and risks of taking out an equity release product.

Risks and alternatives

Choosing an equity release scheme is not something you should enter into lightly. There is always the risk that you might need the equity in your home later on, for example, to pay for nursing home care. Also be aware that if you release some of the equity from your home, you will not be able to pass on its full value to your family or beneficiaries.

With some 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. Ask your provider what their policy is on this.

If you are considering an equity release scheme, get independent legal and financial advice first and consider the alternatives, including:

• selling your home and moving to a cheaper or smaller one
• getting a different type of mortgage if you have an income to meet the repayments
• renting out one or more rooms
• transferring ownership to a family member in return for the cash you need and the right to live in the property for life. Be sure to get independent legal advice if you are considering this option

Getting legal advice

Before you make any decision about an equity release scheme, make sure you get independent legal advice from your solicitor. You can get a list of law firms from the Law Society. Also, consider the benefits of making a will before entering one of the schemes as this will avoid delays in sorting out your affairs after your death.

Fees and charges

Depending on which scheme you choose, you may have to pay:

• a valuation fee. The amount of money you can get through an equity release scheme depends on the value of your home. So it is important to make sure the valuation is independent – you may also want to get a second valuation yourself
• legal fees and costs
• a fee for the independent legal and financial advice you need to protect your interests
• an administration fee

Some companies have a fixed ‘set-up’ fee to cover the legal and valuation fees. You may need to put aside between €1,500 and €3,000 to cover these costs. Some providers may allow you to pay fees through your lifetime mortgage so that you do not need to have this money up front. However, if you pay fees through your lifetime mortgage, you will pay interest on them, meaning they will cost you more in the long run.

Insurance and home maintenance

For all equity release schemes you must:

• keep your home in a good state of repair
• insure your home, noting the lender’s or home reversion company’s interest in the policy

Maintenance costs can be high, particularly as your home gets older. The lender or home reversion company can inspect your home from time to time and they can carry out repairs that you must pay for if you don’t maintain your home to their standard. If you have a lifetime mortgage, repair costs will be added to the amount you owe, so interest would be charged on those costs.

Also bear in mind that some schemes may prevent you from making certain renovations to your home, as your provider may consider that they reduce the value of your home. Such renovations could include installing ramps, lifts or railings, which you may need in the future, so ask your provider what their policy is on this.

Can your home be sold against your wishes?

The terms of your agreement may allow your lender to insist that your home is sold and the mortgage paid off if:

• You move out of your home for six months or more (unless your mortgage is in joint names and the other owner is still living there)
• You don’t insure your home or
• You don’t look after your home to the standard that has been set by your lender to maintain its value

Issues to consider with equity release

• What happens if my partner and I have to go into long-term care?
• How will the money I get affect my pension or entitlement to other state benefits?
• Can the scheme be transferred to another property if I want to sell up and move later on?
• Could the lender or home reversion company sell my home against my wishes?
• What fees and charges do I have to pay?
• How will my decision affect my beneficiaries?
• If I live longer than expected, will I have enough money left to pay for my long-term medical and living costs in the future?
• Can I change my mind? What penalty, if any, could apply if I do?
• What are my rights if I have a complaint against the company?
• If someone who relies on me financially lives with me, could they continue to live in my home if I move out or die?
• What do I want to leave to my children or family? And should I discuss it with them first?

What do you do if you have a complaint about an equity release product?

If you have a complaint about a lifetime mortgage or home reversion scheme, and you are not satisfied with the way your complaint is handled, you can refer the problem to the Financial Services and Pensions Ombudsman.

Home reversion involves you selling a share of your home in return for a lump sum. You do not borrow against the value of your home, instead, the lump sum you receive is in return for selling a share of your home.  The amount you receive is usually much less than the actual market value of the share of your home.

Companies who offer home reversion schemes will usually consider buying up to 70% of your home, but this will vary depending on your age and the value of your home. You can continue to live in your home for the rest of your life, and can use the cash you receive for anything you like. Currently with home reversion schemes, you must take the money as a lump sum – you cannot take it in instalments, but this may change in the future.

Examples

Fixed and variable share contracts

Only fixed share contracts are available in Ireland currently, but variable share contracts may become available in the future.

Fixed share without monthly payments

Under a fixed-share contract, the home reversion company pays you a lump sum in return for a fixed share of your home. The percentage they own and the percentage you keep is fixed from the start and cannot change, no matter how long you live, or what your property is worth in the future.

Fixed Share Contract with Monthly Repayments

Under a fixed-share contract with monthly repayments, the home reversion company pays you a lump sum in return for a fixed share of your home, and requires a monthly repayment from you. Choosing a monthly repayment option allows for a larger lump sum amount to be paid to you that would otherwise not be possible without the monthly payment. There are options as to how long this monthly repayment will continue; it can end on a particular birthday, or on the death of the first homeowner, or some combination of both.

The percentage that the home reversion company own and the percentage you keep is fixed from the start and cannot change, no matter how long you live, or what your property is worth in the future. This is subject to complying with the terms and conditions. Where there are missed monthly repayments, and these arrears continue for more than a year, it may be the case that your share in the property is reduced, which will mean your home reversion product is restructured to reflect this.

Example of home reversion loan

• Home reversion example 1 above no monthly repayments
  In this example, you are aged 65 and your home is worth €232,000. You agree to sell 50% of the property to the home reversion company for 25% of its current market value, so you receive €58,000 as a lump sum. When you die or move to long term care, the house is worth €300,000. The home reversion company will receive 50% the value of the house (€150,000) for their original loan of €58,000 and the remainder of €150,000 will go to your estate for your beneficiaries.
• Home reversion example 2 above with monthly repayments
  In example two, you can see that you receive a higher lump sum of €70,000 as you are in a position to make agreed monthly repayments of €250 per month, up until an agreed age, as per your agreement with the home reversion company.

Variable share contract (not currently available in Ireland)

With a variable-share contract, you get a bigger lump sum when you first sell your share, but the percentage of your property that the home reversion company owns automatically increases each year, without you receiving any more money. Therefore, the percentage of your property that you own will reduce as time goes on.

For example, if you first sold 25% of your home, after 15 years the home reversion company might own as much as 50%. So, the longer you live, the less of your property you will own.

How much could you get from selling a share in your home?

You get much less than the market value of the share you sell. This is because the home reversion company may have to wait several years before they can cash in their share. So, the older you are when you sell a share in your home, the more money you will get.

This is because quotations are prepared based on the life expectancy of the homeowners, which is based on standard actuarial morbidity tables adjusted for the Irish market. In general, you can sell up to 70% of the share of your home, and in return you will get a lump sum based on your life expectancy and whether or not you wish to include a monthly payment.

Due to different life expectancies, a single man would receive more money than a single woman of the same age, as he is expected to live for a shorter time. A couple would receive less as it is expected that one of them will live longer than a single person.

In cases where you fall into long term arrears and need a solution to allow you to repay the loan and remain in your home, up to 95% of the share of your home can be sold, subject to terms and conditions.

When does a home reversion scheme end?

Generally, it will end for one of the following reasons:

• you sell your home or,
• you move out of your home permanently, for example if you move into long-term care or, on the occasion of your death

Can you cancel or end a home reversion contract?

You cannot change or reverse this kind of contract because you have actually sold part of your home. However, you may be able to negotiate with the home reversion company to buy back the share you sold them, and you can usually sell your home on the open market by coming to an agreement with the home reversion company. This would allow you to cash in the value of the share of your home you still own. However, in some cases the home reversion company may not want to sell their share back to you if they will lose money on the sale.

When you die, your estate may use the option to buy back the percentage that the home reversion company owns at market value, subject to their agreement. If the value of the property has fallen to such an extent that this causes a loss to the home reversion company, then they may offer to buy your estate’s share at market value and hold the property. If neither option is taken, the property will be sold on the open market and the shares split between the home reversion company and the estate in line with ownership, after deduction of the costs of sale.

Pros and cons

There are two types of lifetime mortgage, where you borrow money against the value of your home. These are:

• Roll-up mortgages
• Interest-only mortgages

One of the conditions of getting a lifetime mortgage is that you have to pay off any existing mortgage on your home. Interest rates on lifetime mortgages are usually considerably higher than standard mortgage rates.

Roll-up mortgages

With a roll-up mortgage, you make no repayments and you continue to own and live in your home. Interest is charged on the money you borrow and added to the original loan amount. Each month, you are charged interest on what you have borrowed plus the interest added from previous months. This is called ‘compound interest’. The longer a roll-up mortgage lasts, the more money you will owe.

The table below shows how much a roll-up mortgage would grow after 15, 20 and 25 years.

These figures assume compound interest fixed at 6%

You usually repay the loan from the proceeds when your home is eventually sold – following your death or when you move out. However, there is a risk that when the time comes to sell your house, there may be no money left over after paying back the mortgage. Make sure you get a ‘no negative equity’ guarantee.

Interest-only mortgages

With an interest-only lifetime mortgage, you pay interest on the loan each month at a fixed or variable rate, so the amount you owe will not increase over the term of the mortgage. However you will have to make repayments:

The repayments might seem manageable. However, if you are on a variable interest rate and your rate increases, you may find it more difficult.

How much money can you get?

Roll-up mortgage: You can usually borrow between 15% and 45% of your home’s value.  The older you are, the higher the percentage you can borrow. There will probably be an upper and lower limit on the amount you can borrow and there may be a minimum property value.  Depending on the lender, they may allow you to take your loan:

• as a lump sum
• in instalments or
• a mixture of both.

If you don’t need the total amount all at once, it may be cheaper in the long run to take the money in instalments as you need it. If you are approved for a large amount and take it all at once, you will be charged interest on the whole loan.  If you take the money in smaller amounts, you will only be charged interest on the amount you have taken. However, you may be charged a fee for each instalment you take, so you need to take this into account.

Interest-only mortgage: You can usually borrow from €30,000 up to a maximum of 30% of the value of your home. If you are making the repayments yourself, you will have to meet a minimum annual income requirement to qualify for the mortgage. The money will be paid to you as a lump-sum.

When would the mortgage be paid off?

• when you sell your home or
• you move out of your home permanently, for example if you move into long-term care or
• you die

Some lifetime mortgages must be repaid within 30 years of you borrowing the money.

What can you do with the money you borrow?

You are free to do what you want with the money. But bear in mind that the interest you are charged is based on the amount you borrow. If you take more than you need and leave it in a low-interest account you could end up paying more in interest on the money you borrowed than you earn in a deposit account. Your debt will also be larger than it needs to be. Also do not take out a lifetime mortgage in order to fund investments.

Can you cancel or end a lifetime mortgage?

Yes. You can pay off a lifetime mortgage at any time by:

• selling your home and using the money to pay off your loan or
• using any other money you have to pay off the loan

You may have to pay an early repayment fee if you have a fixed interest rate.

What happens if I owe more than my home is worth?

Make sure your lifetime mortgage gives you a ‘no negative equity’ guarantee. This means that you (or your estate) will never have to pay more than the proceeds of your home when it is sold, even if the amount of your mortgage is more.

Does the mortgage lender own any part of your home?

No. You continue to be the legal owner of your property. However, your lender takes a ‘first charge’ on it – this means that they have the right to take enough from the proceeds of selling your home to pay off any mortgage on it.

Advantages and disadvantages of lifetime mortgages