Families pay high price for cashing in early on homes
Published 16/01/2016 | 02:30
They were marketed as a way to use your home as an ATM.
Now the true cost of the cash withdrawals is becoming apparent.
Some 3,100 elderly homeowners are waking up to the true cost of equity release deals they made when the property market was booming, and house prices were more than a third higher than they are now.
Some people who were living in valuable homes, but were 'cash poor', jumped at the chance to take money from lenders in these deals. Bank of Ireland, SHIP and Seniors Money were offering the product.
Equity release is a way of getting a lump sum by mortgaging part of the property. The catch with these products, aimed at older people, is that no payments are made until they die, or the house is sold.
The lender risks that the property's value will be less than the sum advanced, so interest rates of 6.5pc fixed for 15 years were typical. The fact that no repayments are made during the term of the product means that compound interest applies.
Compound interest on a debt means that interest on the capital is applied to interest that is owed.
In a short while, €100,000 originally borrowed turns into €200,000 owed.
This leads to a situation where families can be forced to sell the home if their parent has to go into a home before they die, and wipes out inheritances when they do pass away.
At least 3,000 people owe a total of €300m on so-called life loans, according to Central Bank figures.
This average amount owed works out at €100,000. In many cases, this is double the amount originally borrowed.
The equity release products are no longer available, but repayments are due on ones taken out during the boom.
Banks and other lenders are adamant they explained the full implications of what was involved when the products were sold.
Solicitors and families were fully appraised of the implications, with worked examples provided of what would be owed after five, ten and more years.
However, Fianna Fáil finance spokesman Michael McGrath said he was "staggered" at the costs when he looked at these deals.
Others maintain the products served a useful purpose in providing cash upfront to people with valuable homes.
The pity of the situation is that property prices continue to be below the level they were at when many of these products were taken out.
This - and the fact that by the nature of the equity release products designed for older people, no payments are made until the house is sold - means the huge cost of these mortgages is only becoming clear now.
And many families are finding that they are paying a high price.