Home equity release: shady scheme or lifesaver?

I recently discussed the options open to an elderly cash-strapped relative – quite a common discussion in families these days.  I suggested exploring home equity release. I explained briefly how it worked, but was met with, “No thanks, it’s a shady scheme designed to rob old people of their homes!”

I was rather taken aback, but realised the comment was sparked by ignorance. We understand the concept of paying off a home loan - one day the property will be ours. With a home equity release scheme, it’s the opposite – we receive money from a loan which will mean that one day the property – or part of it - will no longer be ours. It’s a strange concept to get your head around. These schemes are also known as reverse mortgages.

 
Race against money

Growing older has become a race against money, not time. Even if you follow all the retirement planning advice, longevity can throw a massive spanner in the works. Some people are living much longer than the retirement period for which we are able to provide with our savings.

In 2019, the World Economic Forum examined life expectancy and savings provisions across six major economies. They concluded that most people would outlive their money by between eight and 20 years and that women carried the greatest burden.

We don’t have many choices if we find ourselves with too much life and too little money.

Property rich and cash poor?

If you’re a homeowner, your property may be your last resort. You could sell it, but this comes with the stress of moving and leaving a home filled with memories.

The other (lesser-known) option is to tap into your home equity, using this as security to access cash, while still living in your home. You retain ownership and take care of all maintenance, utilities and insurance, and the loan is repaid when the property is sold or you die or move.  

There is only one company offering this product in South Africa. There have been a few offerings in the past, but none have endured, despite the concept being fairly successful in other parts of the world.  

Launched in 2019, Water Financial offers home equity release to homeowners 70 years and older, with a bond-free property worth at least R1 million. Loans are granted on a five-year cycle and the cash released is paid out monthly, resulting in interest accumulating at a slower pace than if it was paid out in a lump sum.

Reverse ownership

Generally, we maintain our homes because this adds value, increasing our net worth. With home equity release, you have to maintain it because it’s stipulated in an agreement.

The cost of maintenance, utilities and insurance can run into thousands of rands a month, so you’re effectively incurring debt to keep an asset in good condition that won’t be yours anyway in the future. Some may argue that it’s smarter to sell and save yourself a ton of money by downsizing.

Where there’s a will, there’s a relative

There is a culture of bequeathing property as part of wealth transfer to the next generation. Home equity release ends to that, unless the heirs can afford to settle the debt.  

But heirs need to remember that helping aging parents financially can be draining, impacting on your own ability to plan effectively for retirement and perpetuating a cycle of dependency in old age. 

So accessing equity in your home can be a good solution but it is important to be open about it with heirs to ensure there are no surprises when you pass away.

In fact, cash-strapped family members may even initiate the discussion around home equity release, taking the heat off themselves. The reality is that the alternative isn’t any rosier. If you can’t afford to support an aging parent and they have no money, then the property will need to be sold anyway. Read more: How do I talk to my aging parents about their finances?

Not everyone’s cup of tea

It’s not for everyone but can certainly be a lifesaver if your back is against the wall. On the plus side, you’ll get to stay in our home. On the downside, you will incur interest and there may be a ceiling above which the lender won’t finance any further.

One risk to using a home equity release scheme is that it relies on the property appreciating in value and you need to pay all running costs, which can add up quickly.

When you consider your options, think about whether it’s time for a change with new spaces and new energy. Selling and moving into a retirement village can bring a sense of community, new friends and wonderful facilities. You may get valuable access to care for your later years. And it may be much cheaper than trying to hang onto your home.

It’s up to you – but do yourself a favour and explore the options and their financial implications before you decide.