The House That Pays For You

Sydney Morning Herald

Wednesday February 19, 1997

Paul Coombes

BORROWING money to help fund your retirement using equity in your home as security is relatively easy. For people with substantial assets and reduced cash flow and for those on pensions it can be an attractive proposition. They can buy comforts that may not be otherwise available - you can't take it with you, so why not enjoy.

There is a caution, however. Borrowers must understand fully what they are committing to when they re-mortgage, or increase mortgages on, their homes. Essentially they are creating or increasing a charge against the home. What usually happens is that principal and interest are paid at sale of the home and any residue transferred to the estate.

Advance Bank has a product called Money for Living, tailored to the needs of people wanting extra cash for almost any purpose.

The loan is available to those aged 68 and older who occupy their own home. Loan value can be up to $100,000 and the minimum loan is $20,000. The loan can be no more than 20 per cent of the home's value. The interest rate is 0.5 per cent above its variable home rate which is 8.25 per cent. The application fee is $350 plus 2 per cent of the loan amount or $600, whichever is the greater. This includes legal fees.

Required professional advice fees on the deal are extra. The bank requires that borrowers get independent advice to avoid problems of borrowers claiming they didn't know what they were getting into.

The core of the deal is the fact that money is borrowed against the owner's equity in the home and no money needs to be repaid unless certain things happen. These are the death of the owner, sale of the home or the owner ceasing to live permanently in the home for a year. Interest on the loan is capitalised - it is charged against the loan and grows over time. The loan usually does not affect a person's ability to live in the house, but it reduces equity.

These loans have been around for about eight years and Advance is reported to have about $50 million in this form of loan.

About three years ago the Federal Government took up the loan theme. It had the Department of Social Security (DSS) put to tender the management of its loan concept - Home Equity Conversion Loans (HECL). The Government wanted loans to be managed for it so more people could readily swap equity for cash without selling their homes. Advance won the tender and, within two years, lent more than $22 million to 4,000 pensioners. The maximum loan was $7,500, but borrowers could apply for annual increases.

Last June the scheme was closed by DSS, without a given reason. Talk in Canberra, however, says it was done as a budgetary move to save money. DSS subsidised fees for loan establishment and for a qualified, independent adviser to explain the scheme to borrowers and ensure they understood the transaction they were entering. With no DSS backing, independent advice remains a requirement for a loan, but all fees are the responsibility of the borrower.

Advance says it does not know the reason for DSS's cancelling the scheme. Existing borrowers, however, are not affected.

David Brown, head of Advance Bank public affairs, warns that these loans are not appropriate for everyone. They should not be considered by people wanting to pass on their home free of debt to a friend or relative. "What those considering such a loan should do," he suggests, "is talk to friends and relations, as well as to their advisers, before committing the home. This is particularly so if the home is to be part of an estate.

"As a general guide, if people want to pass on the value of the home to beneficiaries without any debts, then the Money for Living loan may not be appropriate. However, if you require a loan for something worthwhile, and are not concerned about mortgaging your home, the loan can provide you with a measure of financial freedom."

Releasing equity in your home can be achieved in ways other than the mortgage route. These include personal loans secured by guarantee or other assets, home sale, home sale and lease-back, and other home-backed transactions requiring varying amounts of security and trust - with trust being the operative word.

Personal loans generally attract higher interest rates than those applying to mortgages.

Sale, and sale and lease-back are straightforward. With a sale, you get money and can find another home. In sale and lease-back, you hope the lease is ironclad and the money holds out to pay all the rent, unless special non-eviction and maintenance clauses become part of the lease.

An option could be granted on the home to a friend or relation on the understanding the home would be transferred to them for an agreed consideration and you can live there for the term of your natural life. Again, option conditions should be bullet-proof, like those of the lease.

Options and other types of promises to transfer, or will, properties to friends, relations or even property developers require a great deal of trust on the option granter's part, and if something goes wrong it is not hard to see them being dispossessed or, at best, being involved in a costly legal wrangle revolving around property possession.

Take a simple case. A married son agrees to buy his parent's home for a below-value price on the understanding the property will be maintained and the parents can live there rent-free forever. Everything is happy for a few years, but the son and daughter-in-law fight and head for the divorce courts. The wife wants her 50-70 per cent of the home. This is the start of a likely messy outcome.

If it is reasonable and sensible to mortgage the home, with proper advice and a bank that doesn't want problem people or problem debts, this avenue is one worth investigating.

© 1997 Sydney Morning Herald

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