Property Finance for seniors
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| Property Finance for seniors |
| By Charlene Clayton of Personal Finance | www.persfin.co.za Many South Africans are cash-strapped in their golden years and yet own a valuable property. Financial institutions are now offering reverse mortgages, which enable you to unlock the value of your home without selling it. Your home, which is initially your single biggest financial commitment but which can quickly grow into your most valuable asset, can now be used to augment your retirement income. Both Nedbank and a new financial institution called Seniors' Finance have recently launched loans that allow you to access the value that has built up in your property, without having to sell your home or downscale to a cheaper property. (The shareholders of Seniors' Finance are Alexander Forbes and Sentinel, a market leader in the provision of home equity release products in New Zealand, Australia and elsewhere in the world.) Studies indicate that fewer than six percent of South Africans employed in the formal sector retire with sufficient investments to allow them to have a comfortable retirement. The new type of home loan, which is called a reverse mortgage or a home equity release loan, has been available for many years overseas. Mark Boshoff, the head of product innovation and development at Nedbank Home Loans, says research in the British market by Datamonitor in 2002 shows that the main reason why consumers take out reverse mortgages is to support their income. The second most prevalent reason is for home improvements, followed by holidays, helping out family members and inheritance tax planning, according to the research. Boshoff says Nedbank expects that one of the major reasons why South Africans will choose reverse mortgages is to access finance for their post-retirement healthcare expenses. Although the finer details of the products now available to South Africans differ, the principle is that a financial institution grants you a loan based on the value of your property rather than your income level. You have the option of repaying the loan or not repaying it. If you do not repay the loan, at your death the financial institution will be repaid from the assets in your estate. However, certain events apart from death will trigger the need to repay the loan. These include: if you voluntarily sell your property, if you no longer permanently live in your property (say, you decide to rent it out) or you are sequestrated. Residual value Nic Craig, the managing director of Seniors' Finance, says whether any residual value will be left in your home after you repay the loan will depend on the amount you borrow, the growth in the value of your home and the interest rate applied to the loan up to the point that it is repaid. Craig says if the value of the property is more than the loan balance on repayment, the excess is available to the borrower, or to his or her estate. Borrowers may have concerns about what will happen to their property when they die and leave a surviving spouse. Craig says if the surviving spouse wishes to continue living in the property (and he or she inherited the house in terms of the deceased spouse's will), the executor of the estate (in consultation with the spouse or partner) would need to assess whether the estate can repay the loan without selling the property. If the loan is settled, the surviving spouse or partner can continue to live in the home. It may also be possible for the surviving spouse or partner to obtain a reverse mortgage, provided he or she is fully entitled to the property in terms of the will and all the lending criteria are met. Reverse mortgages are not without pitfalls. The single biggest problem is that the value of the loan (and the interest on it) may exceed the value of the property. The upshot is that you may have to sell more than your home to repay the loan. And if you do not repay the loan, when you die your estate will have to settle a debt that is greater than the value of your property and pay the shortfall from other assets. Repayment guarantees However, Nedbank and Seniors' Finance say they have built in protection against this danger. Boshoff says Nedbank has put the guarantee in place via insurance. The insurance will pay out any shortfall between the value of the property and the loan in the event of: the property being sold because of your death; you needing to move into a high-care facility; the loan term expiring; or you voluntarily selling the property before the end of the loan term. Craig says Seniors' Finance's loan repayment guarantee means that borrowers will never have to repay more than the net proceeds from the sale of their home. Reverse mortgages are loan products and, therefore, do not fall under the Financial Advisory and Intermediary Services (FAIS) Act. This means that if you receive flawed advice about these products, you will have no recourse against the person or institution that advised you to take out the loan. As loan products, reverse mortgages are subject to the National Credit Act, which is being implemented in stages and will be fully operational by June next year. The Act requires that lenders perform affordability tests before lending to consumers and stipulates the fees that can be charged. Gerhardt Meyer, a member of the Financial Planning Institute (FPI), says borrowers must carefully consider the impact of a reverse mortgage on their financial goals. You should seek professional advice from financial planners who are accredited members of the FPI and who are registered under the FAIS Act, Meyer says. Points to consider You need to do your homework and, based on your circumstances, decide whether it is better for you to: * Stay on in your house and take out a reverse mortgage; * Sell your home and downscale to a cheaper property; or * Sell your property and move into a rented one. Generally, the higher the value of your home, the more sense it makes to use a reverse mortgage. There is a cost to selling your home and this can be as much as 12 percent of the selling price. So, on a R2-million property the selling costs can amount to R240 000. You need to consider the "opportunity cost" of the R240 000. By not selling, you are effectively growing the R240 000. If you are given a choice of taking the loan in a lump sum or in monthly withdrawals, remember that the interest on a lump sum accumulates more quickly than with monthly draws. You could lose your property if the market collapses and you don't have other assets to repay the loan. When you take out a reverse mortgage, you need to assess its impact on your overall finances and review your estate plan. A reverse mortgage may not suit you if you want to leave your property to your heirs. There is a risk in using borrowed money at interest rates linked to the prime rate to fund investments and expenses. What Seniors' Finance and Nedbank's reverse mortgages offer you Nedbank Home Income Plan Age of applicant: 65 to 85 years. Minimum loan: R250 000. Loan term: The loan will be granted for a period of five years, after which you can repay the loan or take out a new loan if the value of your property supports it. Loan amount: The amount of the loan ranges from 10 to 45 percent of the property value (see Nedbank's table) and depends on various factors, including the age of the borrower, the value of the property (it must have appreciated in value by a minimum of 3.5 percent a year for about five years), current interest rates and the future outlook for the property market. Loan requirements: The property must be the primary residence of the borrower, which means he or she must live in the house for six months or more in a year. The property must be structurally sound and mortgage-free. The loan amount is granted largely on the value of the property rather than the borrower's income, and so the bank will have an independent valuer carry out a detailed analysis of the structure and condition of the property for valuation purposes. Furthermore, Nedbank will pay the loan proceeds only into a Nedbank account. Interest rate: Borrowers are charged an interest rate that is linked to the prime lending rate. (The current rate is 1.95 percentage points above prime.) The interest rate is fixed for the duration of the five-year loan. Payout of funds: The funds can be paid out in as a single lump sum, or in the form of monthly payments, or as a combination of the two. Costs: There is a loan initiation fee of R262.50, a monthly maintenance fee of R5.70 and an initial valuation fee of R1 500. (There is no revaluation fee after five years if you want to take out a new loan.) No early termination fees are charged. The bond registration costs are about R4 200. Homeowner's insurance: This is compulsory, but you can choose the insurer from which you wish to take out a policy or offer an existing policy, as long as the property is adequately insured. Seniors' Finance Home Equity Lifetime Provider Age of applicant: 65 and older. Minimum loan: R50 000. Loan term: None. It typically runs for the lifetime of the borrower, but can be repaid earlier without penalty. Loan amount: The amount that can be borrowed is based on the value of the property (which must have a minimum value of R500 000) and the age of the borrower. The maximum that can be borrowed is R1 million. The amount that can be borrowed begins at 10 percent of the property value from the age of 65 and increases by one percentage point each year to a maximum of 40 percent at the age of 95 (see Seniors' Finance's table.) Loan requirements: The property must be the main residence of the borrower; it must be of conventional construction, in good condition, represent sufficient value for the loan (based on an independent valuation) and be mortgage-free. Interest rate: Borrowers are charged an interest rate that is linked to the prime lending rate for the duration of the loan. Currently, the rate is 1.95 percentage points above prime, but it could vary from one borrower to the next. The interest rate changes as the prime rate changes, so your interest charge will be lower when the prime rate decreases and higher when the prime rate increases. The relationship between the interest rate and the prime rate is fixed for the duration of the loan, which may be until the death of the borrower. Payout of funds: Senior Finance can pay the loan either in the form of a lump sum or in five equal instalments annually into any bank account. Costs: There is a valuation fee of R1 000. The bond registration costs are R1 500. There are no penalties for early repayment and no monthly administration fees. Seniors' Finance does not charge an initiation fee, but charges what it calls an Express Top-Up Fee of R230 for additional drawdowns after the initial loan has been extended. Homeowner's insurance: This is compulsory, but you can choose the insurer, as long as the property is adequately insured. |
