Liam Croke: equity release can ease pressure on seniors

According to research carried out recently by the Centre of Ageing Research and Development in Ireland (CARDI) there is more than €171 billion worth of property owned by the over 50s. In the 26 counties, 87% of people over the age of 65 own their own home with the average property worth c. €165,000.

According to research carried out recently by the Centre of Ageing Research and Development in Ireland (CARDI) there is more than €171 billion worth of property owned by the over 50s. In the 26 counties, 87% of people over the age of 65 own their own home with the average property worth c. €165,000.

The research, entitled ‘An exploratory study of the wealth of older people in Ireland north and south’, also shows that in the south of the country, households aged 65+ have a median disposable income of €446 per week and the average value of savings held by people over 65 is €5,519.

We also know that 26% of people over the age of 65 (139,202 people) rely solely on the state pension as their only source of income whilst it accounts for 67% of the total income of a further 396,191 people aged over 65.

About 9% (48,185) of people over the age of 65 are still working, and I would safely say that the majority of them are working simply because they have to, to make ends meet, rather than wanting to.

The reason I am referring to all of these statistics is that a significant amount of people over the age of 65 are obviously under serious financial pressure from a cash flow point of view each week and what CARDI found only confirms what we as financial advisors see and hear all the time.

The term ‘asset rich and cash poor’ may apply to significant numbers over the age of 65, so is it an option if you are one of those people to tap into the value of your property to boost your income and standard of living in retirement?

Using bricks and mortar to release money from your property came to prominence in Ireland about 10 years ago when a number of companies came into existence offering people lump sum payments with no monthly repayments required, in return for a % of their property and the up-take was quite high especially given how high property values were back then.

So, releasing equity from a property can be a good idea but like everything else, the devil is in the detail; these types of loans are not cheap and they are complex.

Let’s start off by looking at how much you can get, and this depends on your age and the value of your property. The minimum age requirement is 60 and at this age, you can release 15% of the value of your property and this goes up by 1% for ever year after 60.

For example, let’s assume you are 60 and your property is valued at €165,000, the amount you can release at that age is €25,750 i.e. €165,000 x 15%.

Another example would be if you were 65 and your house was worth €200,000, then the amount you can release is €40,000 i.e. €200,000 x 20%.

That’s all fine, but how much is that going to cost? Typically the structure is known as a roll-up mortgage and it is called this because no repayments are made on the amount released but an interest rate is charged against it each month which rolls up every month.

The interest rate is variable and is about 5% at the moment, It is the same principle as compound interest on your savings where you are getting interest on your interest. This is the reverse though where you are being charged interest on your interest and boy can that add up. The longer you live the more costly this type of loan becomes.

Let’s assume you are 65 and you release 20% from your home which is valued at €200,000; that €40,000 when rolled up with interest means you are going to owe €51,086 after five years and €65,254 after 10 years.

And when I say you are going to owe, I don’t really mean that you are going to have to pay back that money whilst alive (you only have to repay the amount owing while living if the property ceases to be your permanent residence after 12 months or you move into permanent long term care) because the repayment of this type of mortgage comes only after you pass away.

And that is the big benefit to this type of loan because while the repayment of it can be made at any time, more often than not it is made from the sale of the property after the person has passed away unless the beneficiaries of the person’s estate can repay the loan by other methods.

This type of loan may suit some people – I don’t see any harm in single people for example with no immediate family who are dependent on state support and who could do with money going down this route.

Their home is going to be left to a distant relative who will sell it when they die and have a great time with the proceeds. Why shouldn’t that person enjoy some of that money now while they are living. It might make things that bit more tolerable for them.

Releasing equity from your property is a big ask, so you need to seek independent financial and legal advice. Don’t rush into making any quick decisions even if you could do with some money quickly.

If you have children, talk to them and explain that you are struggling because they might be able to help you out. I have seen many cases where adult children were unware that their parents were struggling financially and they had the means to help them, they just needed to ask and I appreciate that that is easier said than done.

Other children have other motives when they rush to their parents’ help when they see how much interest this type of loan eats into their future inheritance!

Other methods of freeing up money when you are older are achieved by downsizing, and this is becoming more popular in the UK and mainland Europe.

It’s cheaper to run a smaller property because the cost of everything from utilities to maintaining the house, reduce in line with the size of your new property.

For some people, renting out a room in their home is another way of increasing their income. I don’t see much evidence of this happening in Ireland – yet – but you only have to look at what is happening across the water because according to research carried out by rental website the amount of people over the age of 65 taking in lodgers has increased by 46% between 2011 and 2013.