Suggested statement
We covered the issue of Life Loans from Bank of Ireland on Wednesday and Thursday last.
As this is a live programme, we don’t have the luxury of being able to check the validity of what the callers are saying.
But we are committed to being fair and transparent on this programme and where wrong information is given out, we like to correct the record. It seems that a lot of our listeners completely misunderstood the Life Loan and we understand that other people who have these life loans were very frightened by what they heard. And we probably frightened off people who were thinking of taking one out now from doing so.
There is nothing at all wrong with lifetime mortgages. With an aging population and declining pensions, there is a huge societal need for these products. In the UK there are at least 13 lenders providing them, including such well known names as Scottish Widows, Canada Life, Nationwide Building Society, Aviva and Legal & General. During 2020, over 40,000 elderly people drew down these
lifetime mortgages with an average of about £100k each. With all this competition, the interest rates in the UK are much lower because of all the competition.
Since Thursday, we have checked out what our callers said and must say that the programme and the callers completely misrepresented what the Life Loan is.
Some callers used completely inappropriate terms and I should have stopped them. These lenders are not predatory, this lending is not usury, they are not vulture funds or loan sharks, the people are not despicable, the rates are not extortionate – they might be high, but they are not out of line with the market.
- Many people gave the impression that they didn’t understand the way in which the amount borrowed would rise so quickly. That no one told them it was compound interest. They said that the product was mis-sold.
Well, we got a copy of the brochure that customers got and, fair play to Bank of Ireland, it could not have been any clearer. It shows up front how much would be owed at the end of each year. How anyone can say now, that they did not realise how much would be due after 15 years, is beyond me.
And the letter of offer showed the projected balance at the end of 5 years, 10 years and 15 years and gave the total interest that would be paid.
And every year, they got a clear statement saying how much the loan had increased by over the past year.
- Some people gave the impression that they went into the bank and were pressurised into taking out a life loan without any advice. Nothing could be further from the truth. Let me quote from the brochure.
Do I need independent financial advice?
We would always recommend a customer obtains independent financial advice to ensure that they understand both the terms and conditions and the drawbacks associated with Life Loan.
Do I need a solicitor?
Yes. It is a condition of the loan that all borrowers obtain independent legal advice. You may also wish to involve your family or anyone else likely to be affected by your decision.
- It was suggested by many callers that they did not know the downsides.
Again, the brochure is very clear. It’s there in big writing and not small print.
Are there any drawbacks to a Life Loan?
• The Life Loan must be repaid in the circumstances set out on page 5, the three principal events being:- once you either sell your home, leave your home for a period of six months or more, or you die
• As you would expect, the Life Loan will reduce the value of your estate. As a result your next-of-kin will receive less inheritance than they would have had you not realised equity from your home
• Customers in receipt of a non contributory pension and who leave the proceeds of their Life Loan on deposit to supplement their income may erode their entitlement to their non contributory pension. In these circumstances, we would recommend customers seek independent financial advice and clarify their entitlement with the Department of Family and Social Affairs
• As no repayments are made during the term of the Life Loan, a significant proportion of the amount to be repaid may comprise of interest
- I repeatedly said that people didn’t realise it was a mortgage.
On reflection, I should not have said that. Every aspect of it was clear that the loan was secured on the home. It was clear in the brochure. It should have been clear in the letter of offer. And just in case it wasn’t clear then the solicitor would have pointed it out.
- A lot of people described the interest rate of 6.9% as penal, as extortionate and predatory.
With interest rates so low at the moment, these interest rates may look high in retrospect. But at the time, mortgage rates for ordinary mortgages were much higher than they are now. For example, back in 2004 a 10 year fixed rate was 5.35%. Fixed rates are higher the longer the rate is fixed for. And as there were no repayments at all until the end, the rate would be higher again. So yes, 6.9% was high, but it was wrong for callers to call it penal or extortionate.
The very first caller on the issue was Ann. She remembered that when she bought her first house, that the interest rates were 15%. She knew it was 6.1% when she took out the mortgage. And she knows that as she had the loan for 15 years, it’s down to 3% now which is not high.
And she and every other customer got a statement every year showing how much interest had been charged that year.
- Some of the callers grossly exaggerated the figures.
We know that if a borrower doesn’t pay any capital or interest on a loan at 6.9%, it doubles after 10 years if no interest is paid over those ten years and triples over 15 years.
David said that his mother borrowed “25 grand” and 12 years later it became 85 grand. We now know that he was on the programme before and in fact, he had borrowed 25 thousand Irish pounds and it was 14 years later, not 12 years later. So €31grand euro became 85 grand euro over 14 years, which is in line with it tripling over 15 years. And he told us the last time that he had gone into the bank with his mother when she took out the loan, so he shouldn’t have said that the did not realise the implications.
James said his mother borrowed €12k in 2002 and it had risen to €43k by 2012. That seems wrong and it should have been only €24k after ten years. But we didn’t get to the bottom of it. He did complain to the Ombudsman who dismissed his complaint, so presumably he had no case.
By the way, the Ombudsman publishes all their decisions and we couldn’t find any decisions on Life Loans – either upheld or rejected. So there doesn’t seem to have been a flood of them. Unlike trackers where the Ombudsman upheld hundreds, if not thousands, of complaints.
Denise said that the original loan was €50k and 5 years later she paid €120k . But that included stamp duty and legal fees as she actually bought the house from her mother. The balance on the Life Loan would have been only €70k. As her mother sold the house, there would have been nothing else to pay – no more interest and no early repayment fee.
- Some callers said that the loans could not be repaid early and that if they were repaid all the outstanding interest must be paid up front.
This was completely untrue.
Under Irish law, any mortgage can be paid off early. It is no different for a Life Loan.
The bank is allowed to charge people with a fixed rate mortgage a reasonable early repayment fee, but they are not allowed to make a profit out of it or impose a penalty.
Again, the brochure was crystal clear on this issue:
If I take out a Life Loan from Bank of Ireland Mortgages can I subsequently decide to repay the loan in full or to make a part repayment?
Yes. Life Loan can be repaid in whole or in part at any time. However, because the interest rate is fixed for the first 15 years, you may have to pay an additional repayment sum if Life Loan is repaid in circumstances other than the sale of your home, your leaving your home for a period of 6 months or more, or your death. If you think this may occur then Life Loan may not be the best option for you.
As with any fixed rate loan, the early repayment fee is quite high at the start of the 15 years, but gets smaller towards the end.
So if the borrower came into money or if their kids wanted to pay the loan off early, they could have done so at any time.
One caller Deirdre said that her mother had borrowed €30k and when her mother had died, it had risen to €70k . She had the money to pay off the loan so she didn’t need to sell the house. But she claimed that someone in the Bank told her that she was just in time. Because a week later the bank would have taken the house off her and it was worth €300k. This was just nonsense and Deirdre must have misunderstood. If €70k was owed, then that is all that would have been charged.
And there is no early repayment charge after 15 years!
When the 15 years fixed rate is up, the interest changes to a special rate for Lifetime Mortgages of 3% variable. That is a lot less than Bank of Ireland’s variable rates for normal mortgage holders which can be as high as 4.5%!
As it’s a variable rate, it can be repaid fully without any early repayment fee. And if anyone wants to pay a part of it, they can do so.
And anyone who has passed their 15 years, can avail of Bank of Ireland’s normal fixed rates but the variable rate of 3% is probably better.
As I say, 3% isn’t a bad rate. If you owe €100,000 today and you live for another 10 years, you will owe €134k after 10 years. Or if you pay the €250 a month interest charge, after 10 years, you will still owe €100,000.
Most of the calls were from people with Bank of Ireland Life Loans. But some of them took out Lifetime loans with Seniors Money. They did not do fixed rate loans. And anyone who took out a variable rate loan did better as mortgage rates came down, but they did not have the security of a fixed rate loan.
7. So what should you do if you have a Life Loan today and you are worried about it?
If it’s Bank of Ireland and it’s past the 15 years, the interest rate is quite low.
If you took it out since 2006, it’s still on the fixed rate of up to 6.9%. If your children can pay off some or all of it early, they should think about it. Talk to a financial advisor.
If you took out a Lifetime Loan with Seniors Money, the one advertised by Mick Lally, it is on a variable rate. The rates they charge existing customers today is between 2.95% and 4.45% depending on when you took out the loan. As it’s a variable rate loan, you can pay it in full or in part at any time without penalty.
8. What if you are worried about the Fair Deal Scheme?
The Fair Deal Scheme is very complicated. If you give your child a present of €100k, then the Fair Deal Scheme will add this back when calculating your means. And it’s no different for the Life Loan. If you borrowed money to go on a holiday or to give it to your child, then they will add this back.
On the other hand, if you borrowed the money to fix up your house with new windows or a downstairs bathroom, the Fair Deal Scheme won’t penalise you for it. Make sure that if you did borrow the money to do up your house, that you keep the receipts to show the HSE when applying for the Fair Deal.
9. The final question you might be facing now is whether you should take out a Lifetime Loan today from the new company Spry Finance which is also known as Seniors Money?
There is nothing at all wrong with Lifetime mortgages. As I said earlier, in the UK there are at least 13 lenders providing them and 40,000 older people took out
lifetime mortgages last year alone.
These loans are worth considering for the following reasons:
- Fixing up your home to make it warmer or more comfortable or to put in a toilet downstairs
- Helping your child get on the housing ladder
- Paying for health expenses not covered by insurance
You should not take out one of these loans or any loan for the following reasons:
- To buy a new car
- To go on holiday
- To pay for a child’s wedding
- To redesign your patio and garden
- To lend to your child to clear their business debts
- To lend to your child to invest in their business
- To make an investment – it’s unlikely that the returns on the investment will cover the interest rate
If you are not paying for these with cash, then say “I can’t afford it.”
But if you do need to fix up your home, see if there is any other way to do it.
Would it be worth selling your big house and buying a smaller more comfortable house instead of borrowing the money?
Would your children be able to lend you the money? After all, they will get it back when you die. And they won’t have to worry about the possibility of a loan eating up their inheritance.
Of course you could go to a Credit Union, but they will charge you 8% and you will have to pay it back over the next 10 years. The Seniors Money loan is a lot cheaper and much more flexible. You can pay it back if you want to, or you can let the interest roll up.
But if you do decide to go for a Lifetime loan today…
If you borrow €100k today and make no payments in the meantime, you will owe €170k after 10 years and €225k after 15 years.
And if you borrow €100k today and pay the interest of €500 a month every month, well after 15 years you will still owe €100k.
Of course, no one knows what will happen to house prices over the next 10 or 15 years. While some of the callers last week took out a Life Loan around the peak of property prices and so their house is worth less today, in general, customers with these products should see the house increase in value by more than the life loan increases, but there is no guarantee of that.
So if you are living in a draughty house and are afraid to turn on the heating because of the expense, then you are better off taking out a life time mortgage and fixing up your house. You might as well live the last 20 years of your life in comfort than live it in the freezing cold so that your children’s inheritance won’t be reduced. Of course, if you are rattling around on your own in a 5 bed draughty house, maybe you should consider selling the house and buying a smaller one which would be cheaper to maintain and more comfortable.