While perusing some newspapers last weekend I came across an advertisement for Later Life Mortgages — or LLMs — in a British publication.
These do not, to my, knowledge exist in Ireland but have become a major source of lending in the UK.
It is, perhaps, time to consider a version of this to assist the transfer of inter-generational wealth in Ireland and assist the creation of equity in the housing market.
Later Life Mortgages are loans made to house owners who are above 55 years of age.
These are offered an opportunity to take out a mortgage on an interest-only or interest-plus capital basis.
The loan is fully repaid when the property is sold, either before or after the owners have passed away or moved in to long-term care.
That may sound like a macabre scenario but consider the alternative.
A narrative has developed which suggests older couples or parents should “downsize” to free up cash for their children.
The thinking goes that these older people are rambling around big houses when they could comfortably live in smaller units.
To me, this attitude is another example of ageism and a level of patronising that ought to be pushed back.
Firstly, these house owners have funded the mortgages attached to the houses over an extended period while they worked.
These mortgages have been fully repaid faithfully and left an asset debt free.
That, alone, deserves some credit.
Second, the emotional attachment of a couple or parent to a house which they lived in for decades and reared a family in cannot be underestimated.
Memories of life in these houses can be powerful and positive factors in a person’s life.
There may also be aspects of a house, such as a mature garden, that is of invaluable benefit to anyone who has invested many years in its development.
For these reasons we should appreciate that many people have limited interest in downsizing and walking away from a property and neighbourhood that means a lot more to them than money.
However, it is an inescapable fact that many older couples and individuals live in highly valued properties that have no borrowing attached to them.
This is the quintessential example of being asset rich and relatively cash poor.
In a market where house prices are high in absolute terms, and Central Bank rules require material deposits, the value of an unencumbered house is obvious.
Therefore, we need to think more imaginatively about how to free up some equity.
This is where Later Life Mortgages (LLMs) come in.
The first priority with such a product, in an Irish context, is to minimise risk of default on the mortgage.
To do this, it would be a good idea to start with a cap on the percentage of the house value that can be subject to a LLM.
Let’s assume a 50% cap meaning the house price would have to halve before the debt equalled the value of the property.
Second, only make LLMs available to borrowers who have proven records in repaying mortgages during their working lives.
These borrowers have a proven ability to manage and repay debt.
Take an example that can best illustrate how an LLM might work. Imagine a house with a value of €500,000. Assume an LLM is made available for 50%.
That provides €250,000 to the owner which he or she can use for a multitude of purposes.
Some may give it to their children as deposits for their own properties.
It will require some imagination and leadership in the banking system to bring forward LLMs in Ireland.
An analysis in the UK shows they are growing in popularity at a rapid pace.
It is surely only a matter of time before they surface via credible lending institutions here.
Joe Gill is director of origination and corporate broking with Goodbody Stockbrokers. His views are personal.