Home Equity Release (HER) loans are often negatively viewed but can be a viable and safe option for older people above the age of 60.
Retired clients who own their own home but have limited income from their superannuation may require funds for a purpose but be unable to meet a standard bank’s income servicing criteria for a loan.
With a HER loan the lender does not require any repayments of the loan (although payments or lump sums can be made if the client chooses to do so). The loan is repaid only upon the sale of the property the demise of the borrower/s.
The advantage of this type of loan is that it does not affect the client’s cashflow and they can use the funds for whatever purpose is required eg holidays, upgrade vehicle, medical expenses or home improvements.
It can offer older clients independence. For a standard type of loan superannuants are often excluded from being able to borrow funds because they don’t fit the income servicing criteria, so they’d often have to ask family to become joint borrowers or even getting them to take out the loan themselves.
However there are disadvantages with this type of loan as well. The first is that the interest rates charged are generally 1 – 2% higher than standard bank home loans.
In some cases family members may feel they are being deprived of their inheritance as the loan increases eating in the equity on the property that may ultimately mean that upon the sale of the house the beneficiaries of the estate may receive less than anticipated.
An important point to note is that while the loan increases in size (as no repayments are made) the value of the property will also increase with capital growth. This means that often the equity could stay the same or even increase depending on the values of the property and the loan. However in lower growth areas where the value of the property may increase at only a very modest rate the equity may be less.
It is imperative that this type of loan come from a reputable lender who offers certain guarantees:
1) “Guaranteed right of occupancy”. This is where the client cannot be asked to leave by the lender.
2) “Negative equity guarantee”. In the rare case that the loan amount exceeds the net proceeds obtained from the sale of the property the lender will not ask for more funds to be paid. This protects the client and the estate that no matter what the funds from the sale of the property will be sufficient to repay the debt owing.
It is always recommended that the client obtain independent legal advice prior to drawing down this type of loan preferably with a solicitor who understands how this type of loan works and what the pros and cons for the client in question. This would allow the client to make an informed decision as to the suitability of this type of loan for their particular needs.
