Homes on the edge
Rising running costs are putting homes at risk. As retirement incomes fail to match up, pensioners are desperately seeking ways of keeping their heads – and homes – above water.

Although there has been a noticeable drop in home repossessions, financial stress remains a negative force in the residential housing market. A growing problem is that of retired people, pensioners and those on fixed incomes being increasingly incapable of meeting everyday living expenses.

Most no longer have mortgage bonds to repay but the rising affordability factor is getting out of hand. For those still with a bond, it's even worse. Administered prices are the main culprit, but general household expenses are rising well beyond the official consumer inflation figures. Electricity charges are the villain of the month, but to some extent these can be contained by cutting back. The real killer is the inexorable rise in municipal charges, rates in particular.

Many retired people are being forced to put their homes on the market. Scaling down makes practical sense, if they can get a decent price, but there is an emotional side to the issue. And if they can't find a buyer and can't pay their rates they may well find themselves out on the street anyway.

Most of us have been made aware of the fact that according to the investment/retirement industry only five percent of the population will be able to retire in relative comfort. Consumers are constantly slapped on the wrist for poor retirement planning and the lack of a savings culture. The fact is that most people battle to pay their basic bills.

But it is scary! Inflation and interest rates and their effect on returns are the culprits. Moreover, life expectancy rates have risen dramatically while "retirement age" norms have hardly moved.

This situation has brought about revived interest in "equity release" or "lifetime mortgages". Basically, equity release allows retired persons or couples the opportunity to unlock part of the capital that has accrued in their homes without - unlike a conventional mortgage - repaying the capital and interest in monthly instalments.

The financial institution values the home, an "upfront" valuation is agreed on and the cash is paid over. A legal charge is secured on the home and the loan, either a lump sum or a drawdown, can be spent as the applicants wish, subject to the repayment of any existing mortgage. The person or couple can remain in the home as long as they live (if one dies the other can choose to remain in the home until death or choose to move elsewhere such as a nursing home).

The interest compounds and when the occupants have passed on, the bank sells the house, takes what it's owed and the remainder goes into the estate.

Equity release schemes have proved popular in the UK, where an estimated 45% of the retired population are homeowners but have inadequate pension incomes. There are basically two schemes in Britain - the Lifetime Mortgage and the Home Reversion Plan, with the lifetime mortgage the most popular. The basic difference is that with a Reversion Plan the lending institution actually buys the property - or a portion - and grants the sellers a lifetime lease with repayments. This system enables the owners to unlock more cash and to retain some equity.

Both schemes, as you might imagine, can create repercussions as far as inheritance is concerned and lending institutions advise applicants to first discuss the issue with their heirs. Interestingly, research in the UK found that eight out of ten children were supportive of their parents' decision to take out an equity release plan. For many children the plan can relieve them of the burden of having to support ageing parents.

The economic key to the workability of equity release schemes, however, is an environment of relatively high house price inflation and low interest rates - exactly what we haven't experienced since the housing boom bubble burst in 2005. Obviously, rising house prices build in collateral backing for both lender and borrower; low interest rates restrain the compounded debt from getting out of hand.

By their very nature lifetime mortgages attract six years. Real (after inflation) house prices are currently increasing at little more than 2% and it is unlikely that SA interest rates will be cut much further.

Another serious stumbling block is the statutoryin duplum rule which was introduced decades ago to protect consumers. This states that a lender cannot recover interest accrued in excess of the principal sum loaned. So what would happen in the case of the preceding paragraph? After six years no more interest could be recovered...

This is probably why Nedbank, the first SA lending institution to introduce an equity release product, its Home Income Plan, limited the product to five years. Thereafter the holder of the mortgage must repay it, sell the property, or apply for a new plan (with no guarantee). Not much has been heard of the product, which doesn't appear to be on offer any more, but both Nedbank and Standard Bank are challenging a Pretoria High Court judgment that basically upheld the fact that the National Credit Act did not overrule or

interfere with the in duplum rule. Judge Ben du Plessis more or less told the applicants that if they wanted the law changed they should go to Parliament and not to a court. We shall now see what the Court of Appeal has to say.

In these times when greater and greater efforts are being made to protect consumers - the NCA being a case in point - it seems out of kilter that any financial institution should seek to challenge such a rule as in duplum. Yet to desperate pensioners it may seem too fine a point.

This article first appeared in Pam Golding Properties' Intellectual Property Magazine.

Article from: