If I choose to release equity in my home, what might happen to State contributions under Fair Deal if my nieces and nephews have to wheel me off to a high-security care home? I’m now 74 and might over-indulge if my bank account gets healthily inflated by one of these loans.
I thought I heard something over the last few years about the HSE being unhelpful about care home contributions if the main asset has been diminished by a loan?
Ms GB
It’s a good point. Equity release may be an attractive proposition for some people, as may Fair Deal, but there is a risk as they are both feeding from the same pond – in this case, the equity in your home.
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Fair Deal, which regular readers will be familiar with, is a system that subsidises the cost of long-term nursing home for residents, according to their means. There are three elements – a portion of your income; a portion of your savings or assets; and, finally, a portion of the value of your home. This last one is the only thing we are concerned with here.
If you are the sole occupier of the home, you are liable to pay 7.5 per cent of its value for the first three years of your residence in a nursing home, after which there is no further charge against your home. If you are a couple, the charge is halved to 3.75 per cent per year for the three years. If your spouse or partner needs to go into care, they pay the balance.
Let’s assume for the purposes of this piece that you live in Rathfarnham, in South Dublin County Council, where the median house price is €426,000.
On that basis, your 7.5 per cent contribution would come to €31,950 a year – or close to €96,000 over the three years.
As with any mortgage, the bank will fix a charge against your home to ensure it gets its money back.
Most people availing of Fair Deal do not have that sort of cash available to them. So what they do is this: they apply for a Nursing Home Loan. This covers the contribution due on the family home with the money being paid from the sale of the property down the line, or after their death.
Naturally, the HSE wants to be sure of getting its cash back if it is advancing you that sort of money. And the way it does this is by taking a charge on your home.
When the house is sold, the transaction cannot be completed until anyone with a charge on the property has that charge satisfied, so Revenue – which will be collecting on the loan on behalf of the HSE – is confident that it can recover the money lent to the nursing home resident.
The issue here, of course, is that any money you tap through equity release is also going to be subject to a charge against the property. How big that charge will be depends, of course, on what form of equity release you choose and the amount that you borrow.
As we noted recently in an On The Money newsletter, there are now several different models for equity release. Several of these follow the traditional repayment model.
The advantage here to the homeowner is that you are availing of a mortgage interest rate that will be lower than any rate you would get on borrowings by way of a personal loan. But, as with any mortgage, the bank will fix a charge against your home to ensure it gets its money back.
If you borrow, say, €100,000 against that home which is valued at €426,000 in Dublin, there should be no issue, as there is plenty of equity for all comers.
Repayment mortgages, of course, make sense only for people who can make the regular repayments – or have someone make those payments for them. When you’re retired – and at 74, most of us would hope to be! – you’re unlikely to have that repayment capacity.
It can be very difficult to get Fair Deal if you have an equity release mortgage on your home, especially a lifeloan-type product
That’s where something like Spry Finance/Seniors Money’s lifeloan comes in. Its big attraction is that you do not need to make any repayments during your lifetime. The downside of this is that the interest bill keeps mounting in the background, which means the amount due can be a multiple of what you originally took out in the loan, if you survive long enough.
If you borrow €100,000 through a lifeloan, the amount repayable 10 years later will be close to double that, thanks to the joys of compound interest, and not far short of three times the amount borrowed in 15 years - which is why you need to think very carefully before going down this route.
As a result, unsurprisingly, Spry Finance insists that there are no mortgages outstanding on any home it lends against. If there are, you will have to consolidate that amount in any loan you have taken, which could make for very expensive borrowings.
Its promise to you is that the outstanding loan balance will never amount to more than the value of your home. But that is little consolation to the HSE and Revenue, which need to make sure that 22.5 per cent of the equity is available to them to repay any loan under Fair Deal.
This is why it can be very difficult to get Fair Deal if you have an equity release mortgage on your home, especially a lifeloan-type product.
If you are the sole occupier of the home, you are liable to pay 7.5 per cent of its value for the first three years of your residence in a nursing home
However, Spry does now offer a feature where you can pay 6.8 per cent interest on your loan instead of the standard 6.7 per cent, and ringfence 20 per cent of the value of the property from exposure to the lifeloan.
That gets you most of the way to the 22.5 per cent required under Fair Deal. However, you would still need to reassure the HSE and Revenue that you, or some guarantor, was good for the remaining 2.5 per cent of the property’s value – €10,725 in our example – before they would consider extending Fair Deal to you.
And, of course, in the absence of Fair Deal, you will be stuck with private nursing home charges of between €5,000 and €8,000 a month depending on location.
So is it possible to get Fair Deal with equity release? Yes, but it is very difficult– and the HSE’s initial position will almost inevitably be to refuse, unless you can show it where the money will come from to repay any Fair Deal loan.
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 with a contact phone number. This column is a reader service and is not intended to replace professional advice
