What are your options if you want to release wealth tied up in your home?
Equity release was all the rage during the
Celtic Tiger
years. Property owners were regularly advised to use equity that had built up in their homes to buy more property.
In an environment where
property
prices were rising fast, you'd be a fool not to ...or at least that was the common refrain, until the bubble burst.
Equity release providers shut up shop almost faster than the banks pulled tracker mortgage offers. The financial peril of playing the leverage game with property purchase rapidly became clear. Many people were plunged into financial turmoil: some have yet to emerge, others never will.
But that doesn't mean there is no place in the market for equity release – only that consumers need to be fully aware of what it involves and clear in their mind as to why it might represent good value for them.
READ MORE
And after a decade long hiatus, equity release is slowly returning to the Irish market.
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Over-60s can borrow against equity in their home. But should they?
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So who's offering such loans, how do they work and what are the factors you need to consider?
Núa Money
Núa Mortgages, which offers mortgages across the range – first-time buyers, movers, switchers etc – were in the news recently when they announced cuts to their rates. They headlined cuts of up to 0.95 of a percentage point and, pointedly, the most dramatic cuts were in their equity release products.
One of their big selling points is the speed at which you will get a decision and the fact that they don't require months of bank statements and evidence of clean living; they just want to be sure that you have repayment capacity as shown by your net disposable income on its assessment calculator.
Núa offers three distinct equity release options – Switcher Extra which allows you take equity from the property when you switch the outstanding mortgage to Núa; Switcher One, which is a debt consolidation product that also offers the option of equity release; and Home Plus, which is designed for people with no outstanding mortgage loan on their home.
How much you can borrow depends on the value of your home and the loan to value that will exist with the borrowings.
Under Home Plus, you can borrow up to a maximum of €400,000 if the loan amounts to half or less of your home's value; €300,000 for loans of 50-60 per cent of the property value; and €200,000 for loans that amount to no more than 70 per cent of its value.
Núa offers a three-year fixed rate of 4.6 per cent on loans of up to 60 per cent and 5.1 per cent for higher borrowings. If you opt for a five-year fix, the respective rates are 4.85 per cent and 5.25 per cent.
The rates for the Núa Switcher Extra allows you to release equity up to a slightly higher level – 80 per cent loan to value.
The interest rates are slightly higher at 4.8 per cent up to 70 per cent loan to value on a three-year fix and 5 per cent if the borrowings are somewhere between 70 and 80 per cent loan to value. The five-year fixes are at 5 per cent regardless of the loan to value.
However, the amounts you can borrow are lower – up to €300,000 on a loan to value of less than 50 per cent, €200,000 from there up to 60 per cent, then €100,000 up to 70 per cent and €75,000 if the equity release brings your borrowings to between 70 and 80 per cent loan to value.
On its debt consolidation Switcher One product, the interest rate is 5 per cent regardless but the amounts you can borrow are reduced – no more than €125,000 even if the outstanding loan to value is below 50 per cent, €100,000 between that and 60 per cent, €85,000 up to 70 per cent and €75,000 from there up to 80 per cent.
In all cases, you are paying a premium for the equity release over its standard first-time buyer and mover rates which starts from 3.6 per cent, a full percentage point cheaper.
Bank of Ireland
Among the mainstream banks, Bank of Ireland offers an equity release option. It says you can borrow anywhere from €15,000 to 90 per cent of the value of your home.
Obviously, if you have an outstanding mortgage, the 90 per cent loan to value upper limit on any equity release will include the outstanding balance on that loan.
Bank of Ireland says you can choose a repayment terms of anywhere between five and 30 years, though clearly that will be impacted by other issues such as your current age.
And Bank of Ireland says you can choose from the same interest rates as those available to first-time buyers, movers or switchers over two, three, five and 10-year terms. These range from 3.3 per cent to 4.05 per cent depending on the term and your home's building energy rating (BER).
On its website, the bank also says the term you choose for repaying the equity release element of your loan can be different from the term outstanding on your current mortgage, though in terms of value for money, the more you extend the life of the loan, the more you will pay in interest.
It also offers a 2 per cent cashback on the new element of the mortgage. So if you are taking €50,000 of equity out of your home by topping up your mortgage, you will get €1,000 back in cash once the agreement is signed.
Spry Finance
And then there is Spry Finance, also known as Seniors Money, which specialises in equity release for those over the age of 60.
Its main product is something called a lifetime loan which allows you to borrow against the equity you have built up in your home. The property has to be worth at least €300,000 if it is in Dublin and €225,000 elsewhere in the State, and mortgage free – or you can use some of the lifetime loan to pay off any loan balance as well as freeing up equity.
You are expected to keep your home well maintained and Spry can insist on repairs if they find otherwise.
The amount you can borrow is determined by the value of your home and your age. At 60, you can borrow up to 15 per cent of the value of the property. The percentage rises by one percentage point every year above that up to 40 per cent of the value of the home for someone who is 85 or older, up to a maximum loan of €500,000. The minimum loan available on Spry Finance is €20,000.
The attraction for many people here is that the interest is rolled up with the loan meaning you do not have to make monthly or other payments.
However, that obviously eats into the remaining equity in the property and you are paying a premium for the privilege as, at 6.7 per cent, the interest rate on the loan is higher than the other options. There is a 'green' rate of 6.5 per cent for homes with higher BERs.
Spry commit that, regardless of how long you live, the balance of the loan will never amount to more than the value of the property. So, you may have nothing to leave your family, but at least you leave them no debt, which was an issue with some previous equity release products in the Tiger years.
You can also chose to ringfence at least 20 per cent of the value of the property so that Spry can only recoup a maximum of 80 per cent of the property value when you die, or sell. Doing so will add 0.1 of a percentage point to your interest rate.
To give you an example of how the balance of the loan can build up, if you were to borrow €50,000 at 70, the loan balance would be almost €70,000 five years later on the basis of the 6.7 per cent fixed rate, and €97,709 at the age of 80. There is also a €1,500 charge to set up the loan in the first place.
Spry does offer a
calculator
on its site to allow you assess the cost of the loan and the value remaining in your home. It assumes the value of the property will rise by 2 per cent a year.
It does offer the option of making repayments against the loan of up to 10 per cent of the balance per year for those in a position to do so.
Lifetime loans are not a cheap option and you need to consider the financial implications carefully before going down this route but it does offer access to funds for people with limited or no repayment capacity.
Equity release got a bad name after the crash and it is certainly worth remembering that this is anything but 'free' cash. However, it does offer people the option to release some of the value of their most valuable asset if the need, or desire, for cash arises. And the range of products available does provide options both for those with earning capacity and those without.
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
.
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