MR O'B from south Co Dublin joins a long line of home-owners who have discovered that their pension is not adequate to maintain their standard of living, but who are living in properties that could provide them with considerably more income, if only some of the built-up equity was released.
"I retired in 1995 and own my family home, now worth between £180-£200,000," writes Mr O'B. "Rather than trade down to release some of this equity to supplement my pension, and have to move out of a house that has been a great home with very fond memories over the past 20 years, I wonder if any of the banks or building societies here are considering a scheme similar to one announced by Bank of Scotland last November called Shared Appreciation Mortgage.
"If such a scheme was available here it would, I feel, be quite popular. In my case I could raise £40-£50,000 on my property, not have to make any repayments and would still have significant equity to bequeath my dependants."
The new mortgage to which Mr O'B is referring has been hailed as one of the most innovative equity release products ever and is certainly an improvement on the life assurance annuity schemes of the 1980s which proved to be a disaster for many elderly people. It takes a two-sided approach to the problem and offers mortgages based on two interest rates - zero per cent and 5.75 per cent, fixed for life.
For the elderly target group, the size of the mortgage is limited to a maximum of 25 per cent of the value of the house, but sets the interest rate at zero. No repayments are made whatsoever. For other people, who feel they need to release equity as well, up to 75 per cent of the value of the property can be mortgaged, but at a 5.75 per cent fixed rate.
In the case of the zero interest loan, when the owner dies, or the house is finally sold, (presumably - if the owner is going to live with a relative or in some other sort of sheltered accommodation), three times the loan percentage is taken from the growth in the property's value with the repayment of the loan being made from the capital.
The 5.75 per cent repayment mortgage is designed to appeal to people who may need extra cash for other purposes - school fees have been cited as a prime reason - and involves taking out a loan worth up to 75 per cent of the property. Upon the sale of the house, a sum equivalent to the loan percentage is taken from the growth in value of the property.
There are downsides to these mortgages - specifically, that if the property market continues to spiral upwards, rather a lot of money is going to be forfeited to the lender, especially in the case of the 5.75 per cent interest rate mortgage. This could very well be money that might be needed to pay for long-term care.
Mr O'B notes in his letter that under this scheme he would be able to take out a zero rated mortgage worth £50,000 or 25 per cent of the value of his £200,000 house. At today's deposit rates, with such a loan, he could boost his annual income by an additional £3,000 net.
But what is the real cost of this loan? Let us assume that his house increases in value by 20 per cent when the time comes for it to sold or passed to his heirs and is now worth £240,000. Under the rules of this scheme, three times the percentage of the loan is taken, from the growth in the value of the property, i.e. 75 per cent of £40,000, or £30,000. The £50,000 he borrowed initially is paid back from the capital. The total amount to be repaid is £80,000 leaving a balance of £160,000.
The attraction of a scheme like this for lenders is that there is no danger that the occupant would have to be forced out in the event that repayments are not made - there are no repayments. The potential public relations disaster is often cited by banks and building societies for why they have shied away from equity release schemes.
The only downside we can foresee is if the property was to devalue when it came time to sell; presumably the bank would only receive the capital back since there would be no appreciation from which to claw back its percentage. Undoubtedly, the banks would apply strict lending criteria for such a product.
By setting the maximum borrowings to just 25 per cent of the value of the house, and "interest" repayments related to the growth in value of the property, the lender is also avoiding another problem - the displeasure of heirs who may see their inheritance disappearing with the death of a parent. Under this arrangement few adult children could (or should) object to a parent enhancing their income by utilising just a quarter of the capital assets of their house, especially since there is likely to be a considerable asset balance after the loan is repaid.
Until such a product as the Shared Appreciation Mortgage, becomes available here, pensioners living in valuable properties have little choice but to trade downward and use some of the profit as income or come to an arrangement with their heirs.
The main banks have told Family Money that the most workable way for pensioners to enhance their income is to secure loans from their children who will then realise their borrowing, plus interest, from their share of the parent's property when the father or mother dies. The loan is raised as a mortgage on the child's existing property, not the parents. This plan, of course, assumes that adult children have property of their own to remortgage and are in a position to assume the added repayments. Covenanting part of the loan to the parent may provide some tax relief to the borrower.
"This issue of equity release on properties is becoming a major issue for us," a source within AIB told Family Money recently.
"There is a huge amount of money tied up in property that could be working more efficiently, not Just for the elderly. We just have to find ways to tap into it," the source added.
