We are in our 70s with two very old cars. We’d like to purchase one brand new car or very good newish secondhand car. Could we borrow from the bank or credit union with the loan secured by the deeds of our house?
We are mortgage free. We just have State pensions and no other income.
Ms R.C., Mayo
There comes a point where older cars just start costing too much money. Either they are unreliable or they need regular and often costly repairs. They are also, as a rule, less fuel efficient and therefore more expensive to run.
So it makes sense for you to look at your options. And, as you note, given your current position, it should be quite possible to survive with just the one car.
The issue for you is clearly finance. At your age and income stream, you need to be sure that you can afford the investment. And given the amount of value that new cars lose in their first year or so, it might make more sense to go for a good secondhand vehicle with a decent owner history.
But I certainly would not get into putting your home up as security on the loan. Not least, the last thing you want is to find that something goes wrong and you are put into the invidious position of selling your home to meet the repayment cost of the borrowings.
To be fair, I cannot see either banks or credit unions lending on that basis anyway. What they will want is some reassurance that you have enough repayment capacity out of your state pension income to afford this purchase and the repayments it will involve.
So the big question for you is how much of your state pension are you currently spending on a weekly or monthly basis. Does that give a lender confidence that you can afford the repayments on the amount you are considering borrowing.
If not, I think you will have to either lower your ambitions in terms of the newness and cost of the car you might buy, or accept that you don’t have the wriggle room on your state pension income to afford an updated vehicle anyways.
My colleague Joanne Hunt has a piece in the paper on Tuesday outlining financing options for car purchase and she notes that one of the big advantages of going to a credit union is that their lending often comes with a life insurance policy attached. This is potentially a really positive feature for you as it means that if one of you were to die, the loan would be paid off automatically and would not be a financial burden on the remaining spouse.
The issue here is whether you would be eligible. The Irish League of Credit unions website notes that the standard requirement is that you are not yet 70, which clearly would exclude you both.
However, it adds that older borrowers should check with their credit union as the eligibility threshold can be raised to 80 or even to your 85th birthday, an age that would more than cover your borrowings for this car if your credit union would agree.
If all that fails and you really need this updated vehicle, you can turn to specialist financial houses that offer money against the value of your home.
There are two models here – equity release (also known as lifetime loans) and residential reversion.
The first effectively allows you to borrow against the value of your home with no payments being made during your lifetime. However, interest accrues and you could find that the car ends up costing a significant chunk of the value of the home when the latter of the two of you dies or otherwise leaves the home permanently – a factor that could come into play should you need nursing home care down the line..
Residential reversions are more specific in that, while equity release is effectively a mortgage against part of your home, residential reversions involve the lender buying a specific share of your home for a set loan figure. The amount they will offer will be significantly below the market rate.
Personally, I would not advocate either of these routes while there is an alternative – including approaching children, if you have any, for a repayable (or no-repayable) financial helping hand. However, if, after exploring all other options, there is no way of getting the finance necessary for this car, then it is an option.
The very important thing is that you understand fully the financial implications of such products.
And while children have no absolute right to any inheritance and therefore no official say in such a decision, the experience of a previous generation of lifetime loans is that the final cost and its financial impact on a person’s estate can be the source of much anger in families.
At the moment, the only player in the Irish lifetime loans market is a group called Spry Finance, also known as Seniors Money. There is also only one player in the residential reversions market, a company called Residential Reversion, also known as Home Plus, and it is not yet fully active in the market.
It’s a very expensive way of borrowing but if you cannot get a loan from the more mainstream providers, it does provide an option.
Fundamentally, at your ages, the key thing is peace of mind and the chance to enjoy your lives without stress and, if possible, discomfort. If you feel now is the time to upgrade your cars, then you should examine all the options and plump for the one that best accommodates your needs. If I were you, I’d start with the credit union.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email email@example.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into