The new year brings interesting financial news

January has already thrown up a few personal finance surprises – some pleasant, some less so. Personal Finance Columnist Jill Kerby this week looks at the re-emergence of lifetime loans - the reverse mortgages for older people with substantial equity in their paid-off home...

Many workers whose companies have availed of the Employee Wage Subsidy Scheme and those who lost their jobs and have been claiming the Pandemic Unemployment Payment (PUP) have discovered that they may have a tax bill to pay.

That these payments were paid gross should have been made clear, but was not. Nevertheless, a typical liability is reckoned to be c €1200 but Revenue have stated that it can be arranged to be repaid over the next four years via a small weekly payslip deduction. Anyone who falls into this category should check their tax statement (if they’re not already registered) at www.myaccount.ie or on www.ros.ie if self-employed where this information has been pre-filled.

This tax bill isn’t particularly welcome, but no one who has remained employed throughout the pandemic – and struggled to spend on much other than groceries, utilities and Netflix subscriptions - can’t be surprised at the news that Irish household savings are now estimated at nearly €124 billion, or more accurately nearly €143 billion when the €18.8 billion in An Post national savings products is included (The NTMA lists this sum as part of the national debt).

And while the third quarter 2020 savings rate did drop to just 19.4% from the c34% rate in Q2 2020, this still represents an unprecedented rate of saving. All you have to do now is to start thinking about how you may want to spend this windfall, keeping in mind that with a national debt of €219.5 billion (it was only €50 billion at the start of 2008) the government is just as interested as you are in the growth of your personal savings.

Lifetime loans

On a more positive front is the announcement that lifetime loans, the reverse mortgages for older people with substantial equity in their paid-off homes, are available to borrow again from Spry Finance and Seniors Money, the retail lending divisions Senior’s Money Mortgages (Ireland) DAC.

Authorised by the Central Bank of Ireland and with new backers, the company is offering to lend age/asset related loans (a minimum of €20,000) to homeowners who are at least 60 years old. The lifetime fixed interest rate is a hefty 5.5% (APR of 5.82%).

Dublin-area properties must be worth at least €250,000 and outside Dublin, at least €175,000. There are no repayments to make during your lifetime, but both the capital and accumulated interest must be repaid if the property is sold, vacated for a lengthy period or upon the death of the borrower (or surviving spouse/partner). There is an early encashment penalty if the total loan is repaid over the first ten years outside of the above reasons though you can make up to four small partial payments per year.

The company website – www.spryfinance.ie is clear and comprehensive about the true cost and conditions of these lifetime loans:

“Representative APR on a loan amount of €70,000 over an assumed term of 15 years at a 5.5% fixed rate would be 5.82% per annum. The total cost of credit would be €89,502. The APR charges include a set up fee of €1,500 (inclusive of a valuation fee of €180 and a loan redemption fee of €100, payable at the end of the lifetime loan term.”

The loan calculator is excellent: it calculates the projected remaining value of the property as the interest payments compound, while assuming an annual 2% growth in value.

While this comparatively high compound interest will certainly eat away at a huge chunk of the asset value of a property over a longer period, there is a ‘no negative equity guarantee’ meaning that you always retain ownership and residency, even in the event that the cost of the interest or even another catastrophic housing crash completely depletes its market value.

There’s been much criticism of the 5.5% interest rate but it reflects the potentially very long period the lender must wait to be repaid, because ‘cheap’ mortgages are not a borrowing option for most older people and they are the only providers in the market.

Even when it first launched in the early 2000s, I wrote that this kind of reverse mortgage is best suited to older people - think 70s and 80s, not 60s – who are asset rich, cash poor and don’t want to trade down. It is especially suitable for older single people in this position or those in relatively poor health.

Where it can be problematic is when it is considered by owners who may want the extra money, but are worried about how their adult children will react to the idea of a smaller inheritance. The solution to that unfortunately widespread problem is to hire an impartial, fee-based financial planner who is most likely anyway to propose that your children, if they can, lend you the money, which will then be “repaid” upon your death or when the property is sold.

Either way, a thorough wealth review and professional advice should always be sought before you consider a loan like this.

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