Older homeowners who want extra income for travel, home improvements or other needs can sign up for a range of products that allows them to realise a percentage of their property for cash, writes Laura Slattery
With every mortgage repayment, homeowners can mentally file another square foot, another brick in the wall, as belonging to them.
But older homeowners who have long since reached the happy state of being free from debt or the threat of repossession may find that it's not much use sitting on a sofa in the middle of their valuable and finely wallpapered asset if they haven't got enough cash to finance their retirement.
So what can they do? They can start reversing the process, selling off their home percentage by percentage, and using the money to upgrade their lifestyle.
A new company, Shared Home Investment Plan (SHIP), established by the former chief executive of Irish Permanent, Mr Billy Kane, is offering to pay homeowners aged 70 and over a sum of money for part of their house, while allowing them to continue living in the property, "rent-free", until they die or move into a nursing home.
This type of product is already offered by a company called Residential Reversions. Now SHIP has announced it will pursue the market on a national basis.
Under the terms of the plan, SHIP will pay a tax-free lump sum for a percentage of a property in good condition that is worth €200,000 or more.
Homeowners retain the absolute right to live in the property for the rest of their lives and are not required to make any repayments.
Time to book a holiday to celebrate this new-found liquidity? Perhaps, but while SHIP places no restrictions on how the advanced money is spent, Mr Kane recommends that senior citizens don't go through with such a major deal for the sake of just a one-off trip.
"This is a life-changing product," Mr Kane insists. It can be used for travel, leisure activities, home improvement, medical treatment, nursing or home care. It can be used simply as supplemental income, but it's not designed as a make-ends-meet product, Mr Kane says: "It's not to pay the electricity bill."
SHIP will buy a minimum of 25 per cent of a property and a maximum of 90 per cent.
In the UK, experience with this type of product suggests that most people sell about 40 per cent or 50 per cent, according to Mr Kane.
And if customers' spending is a little too enthusiastic or if they live longer than they were reasonably expecting, they can always keep on selling up to the 90 per cent maximum. In fact, it may make more sense to sell share-by-share, as homeowners may then gain from further increases in the value of their property.
Like Residential Reversions, SHIP will pay less than market value for the part they buy, in order to reflect the legal right of the owner to live there without having to pay back the lump sum.
So if joint owners of a property independently valued at €300,000 decide to sell 50 per cent of their property, they won't receive €150,000 for the share.
The amount they will receive will depend on their age and sex, with men getting more than women due to their shorter life expectancy.
Figures from SHIP show that for a property valued at €300,000, a man aged 72 would receive €82,370 in exchange for a 50 per cent share, while a woman of the same age would get €75,210 under the same deal. A couple named jointly under the SHIP contract would receive €67,450.
Waiting a few years before giving into the temptation of getting involved with SHIP will boost the price paid for the property share.
At age 75, a man would receive €89,650, a woman would receive €83,370 and a couple would be given €74,200.
Retired homeowners cannot access the equity that has unexpectedly built up in their homes through a traditional equity release mortgage because they usually have no income apart from their pension to make the repayments.
Elderly people are extremely limited in the choices they have, according to Mr Kane. They may have "fond memories" of their family home, he notes, that could deter them from downsizing.
But in the examples above, even a man aged 75 will only receive about 60 per cent of the market value for his share, so homeowners will have to decide if staying put is worth selling part of an asset at such a heavy discount.
Apart from the model offered by SHIP and Residential Reversions, the only other option available to this group is a kind of rolled-up mortgage available from Bank of Ireland.
Called Life Loan, it allows people aged over 65 to borrow up to 20 per cent of the value of their home, or up to 30 per cent if they are over 80.
No repayments are made: instead the money borrowed and the interest due accumulates until it is eventually repaid when the house is sold.
Life Loan is based on an initial term of 15 years at a fixed rate. During this time the loan will grow considerably, so ideally it is designed for people who know that the size of the estate they leave in their will doesn't really matter too much to any future generation.
The same concerns about inheritance apply to home reversion products.
Children are likely to be established homeowners in their mid-30s by the time their parents reach the qualifying age group: big enough to look after themselves. Nevertheless, they may feel resentful that some anonymous company can get their hands on an inheritance they had expected would be all theirs.
Offspring will face mounting costs if they want to keep property in the family. Under the Life Loan product, children have the option to pay off the loan, plus the substantial interest accrued. Under the SHIP model, family members could, in theory, try to buy the home once it goes on sale, although the value of the property is likely to have escalated in the meantime.
Partly for these reasons, SHIP stress that all customers should consult their solicitors and accountants before signing up.
"We have to be extremely careful," says Mr Kane. "The reason probably we are sensitive to the issue is because you could take the view that senior citizens are vulnerable. You might want to go that extra yard and make sure they get independent legal advice."
