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Background
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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.
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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.
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Home Equity Release Plans
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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.
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Repayment
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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.
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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.
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No Negative
Equity Guarantees
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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.
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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.
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SAHERPA's
Role
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....
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