Q: My parents are in their early seventies and in good health. Their only real asset is their family home, which is valued at about €250,000. Their only source of income is their pension and, with the rising cost of living, they are finding it a struggle to make ends meet. They heard about an equity release scheme whereby they can get money released from their home with no repayment while they are alive. They have agreed to borrow €150,000. Can you give some general advice about schemes of this nature?
A: Many people are opting for schemes of this nature. Clearly a lump sum can help with living expenses or necessary maintenance and can allow them to enjoy their retirement.
Your parents would not be expected to make any payments during their lifetime. The monies would be secured by a ‘charge’ on their home, to be repaid only on their death.
The main disadvantage of schemes of this nature is the fact that the repayments can be astronomical. The interest rate is always higher than a normal residential mortgage, but as no repayments are made, the total owed can spiral. If your parents were to remain with us for a further ten years, the sum to be repaid would be around €285,000.
If one or either of your parents were to live to their nineties, the sum to be repaid would be well in excess of €500,000.
Any inheritance that they may want to pass on to the family would be wiped out. These loans sometimes provide that the total owed cannot exceed the value of the home, but equally some provide that a shortfall should be taken from their other assets on death, such as savings, life insurance, or pension policies.
Should either of your parents need the assistance of the Nursing Home Support Scheme in the future, there would be certain aspects of that scheme that would not be available to them as there would be an existing charge on their property.
Loans of this type often include the ability for the bank to carry out maintenance works on the home or to seek the sale of the home if it has been unoccupied for a period of time.
While the advantages to the scheme are clear, there are clearly serious disadvantages. The Law Society has confirmed that schemes such as this should be approached with care.
There may be other options open, depending on the family situation. Before taking any steps, your parents should discuss these with their solicitor and financial advisor.
