Lifetime loans: how much of a risk is equity release?

In Ireland, the late Mick Lally was the face of Seniors Money during the Celtic Tiger, appearing in TV ads for its lifetime loans, which allow older people to unlock the value in their home by borrowing a lump sum secured on the property.

As the property and banking markets collapsed and pushed homeowners into negative equity, many sons and daughter of those who took out lifetime loans discovered that their parents’ estates were mired in debt and providers ceased new business as funding dried up and rock-bottom house prices eroded housing equity.

But by 2021, the easing of the Central Bank’s macro-prudential rules around equity release products, low interest rates and soaring property prices had lured two companies into the Irish market.

Seniors Money resumed selling lifetime loans, this time through a new retail division called Spry Finance, while Residential Reversions, which had traded as Sixty Plus Finance until the 2008 crash, began trading as Home Plus and offered older homeowners a lump sum in exchange for a stake in their home.

But this brief revival has been dealt a setback, with the Sunday Independent revealing this weekend that Home Plus is winding down, after a change in legislation aimed at cuckoo funds by penalising companies with more than 10 properties unwittingly put the kibosh on the home reversion business model. This has reduced what was already a small market for later life lending, says Mark Coan, a financial expert and founder of online money guide MoneySherpa.

“There is a relatively low take-up in Ireland compared to the UK,” he says. “We’re about a tenth of the take-up comparable to other markets.”

For asset-rich, cash-poor homeowners struggling during the cost-of-living crisis or eager to play Bank of Mam and Dad to adult children needing help to get on the property ladder, freeing up cash by releasing equity from their home may seem like a no-brainer.

But critics warn that taking out a lifetime loan (the only remaining product on the equity release market) can be a risky move with lifelong financial consequences. Here are the reasons you should consider equity release — and the reasons you shouldn’t.

Reasons to think of a lifetime loan

You don’t have kids and need money

While the over-65s are living longer and command the highest household wealth of any demographic, at €291,600, they have the lowest average household income, at €29,165, according to a new report by Spry Finance, which offers its lifetime loans to the over-60s and has helped more 1,700 older people release equity in their homes.

If you have a small pension and you need extra cash but don’t want to sell your house, a lifetime loan can help you top up your retirement income or give you a cash fund for a rainy day.

Be sure to exhaust all other options first, though, and consult an independent financial adviser or financial planner so you fully understand how a complex product like a lifetime loan works.

While you don’t have to make regular repayments on the loan, the interest charged by Spry, at 6.95pc, is added to the loan each month, which means the loan balance will grow very quickly if you don’t repay the interest.

“Pay off the loan on a regular basis to avoid interest mounting up,” Coan advises.

If you don’t make repayments, the loan is repaid from your estate after your death or after you move into long-term care, so the debt from the loan will eat into the value of your home. This will reduce the value of your estate for your family or any other beneficiaries of your estate.

As a result, the product might be better suited to borrowers who don’t have any children to pass the home on to or have children who are already set up in life, says Colin Rockett, a senior mortgage adviser with NFP Ireland.

You need to help your child buy a home

One of the most common uses for a lifetime loan is to provide a “living inheritance” for children and help them get on the property ladder, Spry said. But you should tell your children the life loan will reduce the value of any inheritance they may be expecting. Taking out the loan must be your own decision — do not let your son or daughter put you under pressure to take out one of these loans.

For an energy upgrade

If you’re living in a draughty house and are afraid to turn on the heating because of the expense, you might be better off using a lifetime loan — in combination with SEAI grants — to make your home more energy efficient. This will reduce your long-term energy bills and increase the value of your home. Spry offers a slightly lower interest rate on its green loan, at 6.75pc, for customers who use its product to upgrade their energy efficiency.

To refinance your mortgage

If you’re a so-called mortgage prisoner because your loan has been sold to a vulture fund and you’re paying sky-high variable interest rates, you can release equity from your home to pay off that existing mortgage.

Reasons not to go for a lifetime loan

You want a new car or to go on a cruise

Think twice about releasing equity from your home for lifestyle reasons, such as buying a new car, going on a cruise, or paying for a child’s wedding. If you use a lifetime loan for lifestyle reasons, you may be ineligible for a nursing home loan in future through the Fair Deal scheme, says Tom Murray, of FairDeal Advice.ie.

Many older people can’t afford to pay the HSE up to 7.5pc of the market value of their home for three years as their asset contribution towards care. Instead, they take out a nursing home loan, using their home as security.

But the HSE doesn’t regard a lifetime loan as a deduction when calculating your property asset contribution unless the borrowings have been used to repair, improve or purchase the property, and may refuse the loan, leaving you to pay those nursing home contributions yourself.