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06 Oct 2022

Making Cents: Cash flow solution for Limerick's over 60s

Making Cents:  Cash flow solution for Limerick's over 60s

Sixty-three percent of people in Ireland say they have ‘little to no’ disposable income due to the cost of living crisis, according to a recent poll Picture: Pexels

THE IMPACT inflation is having on the cost of goods is affecting people on fixed incomes more than anyone else.
And those who are retired and whose only source of income is perhaps the state pension and/or a small private pension, are particularly vulnerable because they don’t have the ability to earn any additional monies and are reliant on what the Gov will award them at budget time, which isn’t nearly enough for most to combat rising costs..
And when I say they don’t the ability to earn more, that’s not quite correct. Some might be okay with working part-time and some may rent out a room in their property under the rent a room scheme, but I’m not sure whether many choose either of these options.
Anyway, there is an option of freeing up cash, that maybe some people haven’t thought about and that’s releasing equity in their property.
The idea behind this strategy is that you have people who are asset rich and cash poor i.e. they are living in a property that might be valuable but that means nothing to them unless they sell it.
But then they have to find another property to live in, and that’s not something most would want to do.
They can avoid this and avoid having to borrow money as well, which is probably an option not available to most who are not working and on fixed incomes, by releasing equity in their property.
The two big advantages to people who choose this option is that (a) they are getting access to tax free cash that they can use as they see fit and (b) they’ll never have to make any monthly repayments on the amount received, ever.
More of this to come shortly and I’ll explain how the monies released are paid back.
But first, some of the eligibility criteria to qualify for this type of product are:
• You must be 60 years or older (and if there are two of you, the youngest must be 60).
• The property you are releasing equity from must be your main residence.
• The property must be mortgage free.
• The property must be of standard construction and in good condition.
• The property must be located in the Republic of Ireland.
• The property must have a minimum value of €250,000 if located in Dublin and €175,000 outside of Dublin.
• The maximum amount that could ever be released is €500,000.
• Every person named on the deeds must enter into the equity lease agreement.

How much can you borrow?
That will depend on two things (a) the value of the property and (b) the age at which you borrow the monies.
Starting at age 60, the % allowed is 15% of the value of your property.
And this % will increase by 1% for every year beyond age 60. So, if you borrow at age 69, you can release 24% of the value of your property, at 74 you could release 29% and so on.
Let me give you some examples of what this would look like:

Example 1
John and Mary are both aged 65. Their primary residence, which is mortgage free is valued at €350,000.
The amount they can release is €70,000, i.e. €350,000 x 20%.

Example 2
Michael is a bachelor and lives alone. He’s 76 and his property is valued at €190,000.
He can release €58,900 i.e. €190,000 x 31%.

The Cost
The interest rate charged for the monies borrowed is fixed at about 5.45% pa which is compounded monthly for the lifetime of the loan which is (a) for as long as you’re alive or (b) until such time the funds are repaid in full.
So, if we look at example 1, John and Mary and the €70,000 they borrowed.
If this loan ran for 15 years, the balance outstanding would be c. €158,000.
And if we look at example 2, Michael and the €58,900 be borrowed, the balance outstanding on that loan 7 years later would be c. €86,000.
Because the interest rate is fixed, it’s possible to work out what will be owing at any time in the future, and each borrower would receive an annual statement showing exactly what interest has been added. But a simple online compound calculator will show you this as well. What you don’t know is what the future value of the property will be.
If John and Mary’s property increased by an average of 1% per annum, in 15 years’ time, the value of their property would be c. €406,600.

And after their loan is repaid (€158,000) from say the sale of the property, the balance left for them or to those who inherit their property would be €248,600.
So, we know what will be owing in 15 years’ time, it’s what the value of the property will be is the unknown and you have to make some assumptions in this regard.

Repayment of Loan
The trigger to repay the loan doesn’t happen until one the following happens:
1. The sale of the property
If you decide to sell the property for whatever reason, the loan becomes repayable immediately.
2. Death of last surviving resident
Once the person dies, or the last person of a couple passes away, the loan becomes payable.
But not immediately either. The executers of the deceased’s estate who are responsible for the repayment of the loan, are given c. 12 months to settle their affairs before the funds become payable. However interest will continue to accrue and will be added each month to the loan until it’s repaid in full.
3. Ceasing to reside in the property
If the person or last surviving person when there was two, ceases to reside in the property, for greater than 12 consecutive months, then the loan becomes payable.
An example of this happening would be if they had to go into a nursing home, but there might be other reasons as well.
If any of the above happens, the proceeds usually come from the sale of the property, but they don’t have to either. If there are other funds available that can be used without recourse to selling the property, they can be used as well. So, the property doesn’t have to be sold.
And if it had to be, and there was a collapse in the housing market and the loan outstanding was greater than the value of the property, the lender will have to suffer whatever loss that is, provided you didn’t fail to adhere to the terms and conditions of the loan from the outset, or you gave incorrect or misleading information at the time of application, or you acted fraudulently with the loan agreement.

Watch Outs
Getting access to money through this route isn’t for everyone, but it’s an option perhaps worth exploring, nonetheless.
But you must do your due diligence and know exactly what you are taking on, and what the impact this type of loan might have. For example, if one of your children still lived with you and you passed away, they don’t have a right to continue to reside in the property. And the monies released could also impact any benefits you are getting from the state i.e. a medical card.
So, important to talk this through with your spouse, and your family and getting independent legal advice is essential and is something you must do anyway, as it’s a condition of the loan offer.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie

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