Earlier this year, a provider of Lifetime Loans reopened to new applicants in Ireland but consumers who may be considering one are warned that these are complex products that require careful consideration.
The loans are offered by Seniors Money Mortgages (Ireland) DAC, and information and guidance is provided by its retail division Spry Finance. A Lifetime Loan or Lifetime Mortgage is a type of equity release scheme.
“With a lifetime mortgage the consumer borrows money, using their home as security, that will be repaid when they sell the property or after their death,” Muriel Dolan, Head of Financial Education with the CCPC, explains. “The consumer does not make any repayments and they continue to own and live in their home. Interest is charged on the money borrowed and added to the original loan amount that is usually at a higher interest rate than a normal mortgage.
“Each month, the consumer is charged interest on the amount borrowed as well as on the interest built up in previous months. This is called ‘compound interest’. This means that the longer the mortgage lasts, the monthly amount that is added to the consumer’s debt will get higher and higher the longer the mortgage is in place.” Spry Finance say their product, which has an interest rate of 5.50%, fixed for the life of the mortgage, gives options to older homeowners who are often ‘asset-rich’ but ‘cash-poor’.
“For every ten people who were aged 60 or older when we first launched in Ireland back in 2006, there are now fifteen,” Derek Handley, Director, Spry Finance, says. “The family home remains the single biggest asset most of this age group have, and a Lifetime Loan allows them to release some of the value tied up in that home, without having to sell or move out of it.” Year-to-date (to May 12) the CCPC noted a 21% increase in page views to their consumer information on equity release at ccpc.ie when compared to the same period in 2020, but says careful assessment needs to be done before committing to such a loan.
“Equity release schemes are complicated products and it is essential that consumers fully understand how the scheme works, the risks involved and the full costs,” Ms Dolan says.
Consumers are advised to consider a number of questions and scenarios carefully before proceeding.
Do you know what the overall cost of the debt will be?
“Lifetime mortgage schemes often come with compounded interest rates, which essentially means the longer the mortgage lasts, the more money you will owe in interest,” Ms Dolan says. “You should always calculate what the total cost of the debt would be over several possible time periods to understand how significantly interest can build up over the term of the loan.” She says you also need to consider what happens to the scheme repayments or the partial share in your asset if you pass away.
“Would the debt pass on to your next of kin, children, wider family or beneficiaries?” she asks. “If you take out a lifetime mortgage you will not be able to leave the full value of the house to your beneficiaries when you die, as the lender will have to be repaid first and when interest is added to the sum borrowed this could be a very substantial amount.” You should also consider what happens if you and/or your spouse have to go into long-term care, as the debt becomes repayable a set length of time after the borrower moves permanently out of the home.
If you get a means-tested social welfare payment such as the State Pension Non- Contributory then your payment may be reduced if you get a lump sum of money. You can contact your local Social Welfare office or Citizens Information to find out more.
The CCPC highlights possible alternative options which older consumers should consider.
- An alternative loan product: A consumer may wish to consider a different type of mortgage or loan but only if they have an income to meet the repayments.
- Creating an additional source of income such as renting out one or more rooms in their home.
- Selling a partial share in the property to a family member or transferring full ownership with a legal right to stay in the property for life. It’s important to get independent legal advice when considering this option.
“Before making any decision about an equity release scheme consumers should get independent legal advice from a solicitor,” Ms Dolan says. “They should also consider making a will before entering an equity release scheme to avoid delays in sorting out their affairs after death.
“Consumers should also consider getting independent financial advice to ensure this product best suits their needs and to explore alternative options available to them.”