Will equity release provide the key to Spanish apartment purchase?

Could you give me some names of companies that offer “equity release loans” so that I could buy an apartment in Spain.

I am aged 63 years old. The sole owner of my home which is mortgage free and which is let. It is valued about €300,000

I would like to borrow €40,000 and be able to pay the loan back over five years. I am retired on a very small pension but I have about €10,000 rent a year coming in to repay a loan.

Mr J.T., email

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Equity release is a very limited market in the Republic these days. There used to be more companies involved but the financial crash 15 years ago saw the back of them. Now there are just two players in the market and only one of them offers loans.

Having said that, you are not their stereotypical customer.

Lifetime loans and equity release tend to be pitched at older consumers who are retired and have no income stream to service a more normal loan. However, you do have such income — about €10,000 a year from the rental of this property, your home.

That being the case, you may find it is possible to borrow the sort of money you are looking for from a normal bank or credit union lender. And, in the circumstances you outline, where you want to pay the entire sum back within five years, it would make far more sense on financial grounds.

The one concern a bank or credit union might have is your repayment capacity. You say your rental income is €10,000 a year but any lender will be more interested in what is left over after tax. With a €40,000 loan repayable over five years, the best personal loan rate in the market currently is 5.9 per cent at Avant, which would involve repayments of €767.74 a month if they would lend to you at all. That’s more than €9,200 a year which would leave you precious little of your rental income even before you consider any tax due on that money.

If you could secure a mortgage loan instead — where Haven is currently the best option available to you — you’d still be paying interest of 2 per cent per annum, monthly payments of €701 and change and annual payments of about €8,400.

And all that is assuming the rental income was more or less fully available to pay off this loan. However, you say your only other income is a small pension. How small will be critical but bank lenders will want to be comfortable that you can meet your loan repayments.

If you have to turn to equity release, things will get expensive. The only lifetime loan provider in the State is Spry Finance/Seniors Money.

They will lend to anyone over the age of 60, so you’re okay there, but they will take a €1,500 loan arrangement fee from the sum borrowed, so you’d need to borrow €41,500 if the €40,000 is all destined for this Spanish bolt-hole.

They also charge a fixed rate on the loan, currently 5.45 per cent, but it is not designed to be repaid as quickly as you envisage. Any repayments within the first 10 years of the loan will incur an early repayment charge — a break fee — which could make the whole thing very expensive.

You are allowed pay back between €500 and €2,000 a year without penalty, as long as the total annual payment is less than 10 per cent of the outstanding loan — but anything over that will incur a charge based on a formula that takes account of the amount outstanding, the number of years short of the 10-year window that you are at the time and the prevailing difference in bond rates.

If a lifetime loan is expensive, the alternative is potentially even more so. It is called residential reversion. Here you are not getting a loan but essentially selling a share of your property to the finance house.

Again, in Ireland, there is currently only one provider, called HomePlus. As they can’t get access to their share of the property until you die, they charge an eye-watering premium. The company chief executive, using an example of a couple aged 67 and 70 looking to release 25 per cent of the value of their home, said HomePlus would take a 72 per cent ownership stake in the property.

If you have no other alternatives and still want to proceed, fair enough, but you really would want to assess all other options first, most notably getting professional financial advice.

The preference certainly is to use the mainstream lenders, such as banks and credit unions, if you can. Only if that door is shut to you should you entertain equity release.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice