Equity Release

Equity release is intended for homeowners who have reached or are close to retirement age, and have built up a large equity on their home over the years. A house that cost the equivalent of €2000 in 1965 could now be valued at €250,000 (actual example). That equity is tied up until the owner dies unless they wish to sell and downsize - even then their equity could be substantially reduced.

A major benefit of equity release is that it does not normally involve any repayments, and the cash is made available to home owners when they can use it: when they are alive. However, such arrangements do not suit everybody, and possible alternatives are:

a) Downsize: sell your home and move to a smaller one costing less, giving you money to spend.

b) Sign the home over to a family member in return for cash or a good income, with an agreement of free tenancy for life. This has been done, but can cause family friction if you have more than one child.

c) As b) but to a third party: this has also been done, but it can be dangerous, particularly if laws change, or the third party can find some loophole to evict you.

d) Remortgage for a cash payment, the house being transferred to the mortgage holder on your death. However, you have to make the repayments.

There are problems associated with each of these, and the equity release schemes available to overcome these are lifetime mortgage loans and home reversion programs. Let's look at each of these in turn.

Lifetime Mortgage loans

Lifetime mortgage loans are designed to give you cash secured against your home. You can remain living in your house and have no repayments to make. You can borrow between 10% and 45% of the value of your property, and the money is repaid when your house is sold after your death. The older you are, the more you can borrow for obvious reasons.

You can receive your money in a number of different ways, such as:

• In monthly payments, such as a pension, or
• As a lump sum, allowing you a holiday of a lifetime, or
• A bit of both

The equity release mortgage is repaid:

• When you sell your house, or
• When you die, or
• You have to move out permanently, such as for ill health.

Each case involves the sale of your home, which cannot be included in your will (though the excess proceeds of the sale can be).

The interest rates you pay on equity release are higher than normal - about 35 higher - and can be arranged on a fixed or variable basis. This is a lifetime mortgage and the interest is added as a lump sum at the end, so there could be very little left once the house is finally sold. If the amount owing Is more than the house sells for, the balance can be taken out of your estate unless you have negotiated a deal with no negative equity.

If you have no family, you will not have to worry about this, but if you do then it be best of you did get a 'no negative equity' arrangement. The lump sum you receive might be less, but it would give you peace of mind.

Home Reversion

Home reversion differs from lifetime mortgage loans in that you sell a share of your home for a set price. The price you get is generally less than the market value, and you are not legally receiving a loan, but selling part of your property that is then owned by the 'lender'.

To explain it better, let's say your home is worth €400,000. Under this scheme you can sell a 50% share giving the 'buyer' that amount on the sale of your home. They can actually decide to buy between 10% and 90% of your property value. You get your share as a lump sum, and can continue to live in the house until you either have to leave through ill health or die.

Such schemes can be conducted on a variable or fixed share contract. In the case of the latter you sell a fixed share of your property in return for a lump sum, and in the latter you are given a lump sum of money greater than the market value of the equity on your home, but the proportion of your property that is owed by the home reversion company increases annually without your receiving any more money.

In other words, the longer you live, or the longer the scheme is live, the less of your home you own, and the more of it the home reversion 'purchaser' owns. It is a good deal for many older people, but not so if you are younger. There is a price to pay for all such schemes, and you have to take advice as to which is best for you. Good legal advice is essential.

There are cost implications with all of the above optional mortgage-related products. The major ones to consider are:

a) Home valuation fees: a valuation is needed whenever you make changes to your mortgage provider.

b) Legal fees: solicitors costs will invariably be involved, and others such as conveyancing costs could also be payable.

c) Property valuation fees: essential if your home has to be evaluated prior to remortgaging or equity release agreements are finalized.

d) Mortgage broker fees - if you are remortgaging or seeking new sources of finance.

e) Penalties if you have fixed interest rates and are changing lenders.

There might be others, but these are the major costs that could be involved when you make any changes to your mortgage arrangements. If you have any questions or queries on any topic connected with mortgages, please contact us and we will get back to you with an answer as quickly as possible.