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Definition of "Home Equity Release"

A Home Equity Release loan, alternatively referred to as a Reverse Mortgage loan is a loan extended as a lump sum or multiple payments to borrowers who are over the age of 65, in terms of which residential property is offered as security for the loan which is not ordinarily repayable for the lifetime of the borrower, subject to confirmation that the "in duplum rule" has no force and effect in the context of Home Equity Release products.

Home Equity Release loans are often considered to be viable solutions for retired persons who are described as "asset rich" but "cash poor". The beauty of Home Equity Release loans is that borrowers are able to use their residential property as security for loans, using the loan proceeds for whatever they choose, which might be anything from meeting the essentials of one's retirement through to meeting one's retirement dreams. The reason that these loans are so attractive to so many people internationally is due the fact that they do not need to be repaid on a monthly basis, so, borrowers get the benefit of accessing the equity in their homes through their Home Equity Release loans, and can now use the loan proceeds to maintain or enhance their quality of life in retirement.


International Track Record

The concept of Home Equity Release is internationally established, having been in existence from as far back as the 1960s.

Other territories in which Home Equity Release products are offered include Australia, England, Ireland, Spain, the United States of America, New Zealand, Canada and many more still...

South African consumers can take comfort from the fact that our industry has developed much later than elsewhere in the world, which has allowed us to benefit from their experiences, and therefore ensure that the South African Home Equity Release industry is shaped according to international best practice.


Home Equity Release Plans


Differences between Home Equity Release loans and Reversionary Products

As described in the definition of Home Equity Release loans above, the purpose of the borrower's property in the context of a Home Equity Release loan is to act as security for the loan. As the property is merely collateral for the loan, the property remains in the borrower's name. The effect of this approach is that, all things being equal, it is the borrower's prerogative to decide how to repay the loan (i.e. out of which assets), subject to an understanding that, in the event of the borrower not having any other assets to settle the Home Equity Release loan, he / she might need to sell his / her property in order to repay the loan. Having said this, by virtue of the fact that the property remains registered in the borrower's name, in the event of the proceeds on the sale of the property being in excess of the value of the loan, the borrower would benefit from and receive this difference. In other words, in terms of Home Equity Release loans, borrowers can benefit from any appreciation in the value of their properties subsequent taking out their loans.

In contrast, Reversionary Products (which are also reasonably common overseas, but are not yet available in South Africa), operate on the basis of the prospective customer, who would also need to be a home owner, effectively selling a portion or all of his / her property to a reversionary product provider at the point of entering into the reversionary contract. The product provider would then pay cash, but at a discount relative to the current market value of the property, to its prospective customer for the purchase of a portion or all of the customer's property. The customer would however continue to be allowed to live in the property, acknowledging that on his ultimate death, the reversionary product provider would normally sell the property and benefit from part or all of the appreciation in the value of the property, by virtue of the fact that it has been the part or full owner of the property since the date of the original transaction with the original home owner.

Home Equity Release loans and reversionary products are fundamentally different. If you do not understand the difference between the two, or are unsure of their implications, you should secure professional independent advice.




Acceptable Repayment Events

The point at which one needs to repay a Home Equity Release loan is vitally important. In the event of the public considering Home Equity Release loans which are repayable in circumstances other than those detailed below, we would strongly advise customers that they proceed very carefully, as they may be forced to repay such loans in circumstances that we do not consider to be appropriate:

The death of the borrower
The borrower selling the security property
The borrower permanently moving out of the security property
The liquidation or sequestration of the borrower
On a voluntarily basis, at the borrower's discretion (but with no penalty)
In the event of material default / breach  of the loan agreement by the borrower

Most importantly, borrowers should not enter into Home Equity Release loan contracts that give the loan provider discretion to decide when a repayment may or not be required. Borrowers should clearly understand what events give rise to the loan needing to be repaid, so that they are able to organise their affairs accordingly.


The Lifetime Nature of Home Equity Release Loans

Internationally, Home Equity Release loans are often referred to as "lifetime loans", predominantly because these loans are not usually repaid by borrowers until they die. So, while there are a few other repayment events that we consider to be acceptable prior to the death of the borrower, ordinarily speaking, we believe that it is important for the borrowers to be able to continue with their loans, with no potential changes to the terms and conditions of their loans, for the rest of their lives.

As a result, if your loan provider does not offer you a loan contract that guarantees, all other things being equal,  that the contract will run for the rest of your life, you should be very wary of such contracts, as they would not comply with SAHERPA's Code of Conduct.


No Negative Equity Guarantees


Why is this Important?

At inception, Home Equity Release loan amounts are typically significantly lower than the value of the borrower's property. However, due to the uncertain extent to which the property value will appreciate into the future, relative to the interest that will be applied to the loan into the future (which will definitely make the loan balance grow over time), the ultimate value of the property relative to the ultimate outstanding balance attributable to the loan cannot be predicted.

If the house value way exceeds the outstanding balance of the loan when it is repaid, this outcome would clearly be in the borrower's interest, as the borrower would benefit from and receive the difference between these two amounts. However, borrowers would have an obvious concern regarding the implications of having a loan balance that potentially exceeds the value of the borrower's property. Borrowers do not want to be left with debts that exceed the value of their properties, nor should they want to leave this kind of problem for their families in the event of their death.


What must your contract say?

SAHERPA believes that credible Home Equity Release loan providers should offer their customers a contractual undertaking that, provided that the borrowers have adhered to the terms and conditions of their loan contracts, they will never be responsible for a loan amount in excess of the net sale proceeds of their properties.

So, using a hypothetical example, if a borrower's outstanding loan amount was R3 million, yet the net sale proceeds of his property (after deducting estate agent's commissions, legal expenses and all other related costs) amounted to R1.2 million, the borrower should never have to repay more than the R1.2 million (i.e. the net sale proceeds of the borrower's property). The remaining R1.8 million should be written off by the loan provider.

In other words, the Home Equity Release loan provider must contractually undertake to carry the risk of the loan amount exceeding the net sale proceeds of the property. If the loan provider does not provide this contractual guarantee, the borrower, or his / her heirs or dependants, could be left with a liability way in excess of the value of the property, which would clearly be problematic.



SAHERPA will not accredit a Home Equity Release provider unless they are able to provide this contractual guarantee. So, if your Home Equity Release provider does not provide this guarantee, or if your Home Equity Release provider is not accredited by SAHERPA, you should be very concerned indeed! Be careful that you don't leave your family with serious financial problems....