Moneymakeover Irish Times: "Life loan proves a millstone for 97 year old"

Brendan Burgess said:
I got a copy of their brochure when Joe Duffy did a hatchet job on them a few years ago. I attach it. It's very clear.
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Presumably you're referring to this.

My complaint to RTE about the programme on Life Loans

Note: The first two posts are very long. But it's necessary. I have today sent this email to RTE. To: Lisa Marie-Berry , Producer LiveLine by email to: complaints@rte.ie; joe@rte.ie; Rebecca.meehan@rte.ie; lisamarie.berry@rte.ie From: Brendan Burgess 2nd February 2021 Hi Lisa-Marie I...
www.askaboutmoney.com
 
According to AI:
In 2003 at age 72, the average Irish woman could expect to live for an average of 13.8 to 14.2 years, say 14 more years.
In 2003 the rate a bank could borrow at, fixed for 14 years was 3.80% to 4.50%, say 4.15%
The Bank actually charged 5.6%
Which is to say 1.45% over cost.
Is that excessive to take account of expenses, risk of her living to 100 with no house price increases, actual house price decreases, interest rate variations if they needed to refinance the money?
On the face of it 1.45% doesn't sound like much but compound interest is tricksy.
 
Brendan Burgess said:
But it would fit in with my memory that you can't get approval up front and draw down the loan as you need it.
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If, as the quote from the brochure suggests, a common use of life loans was to supplement a non-contributory pension, then a product that doesn't accomodate phased drawdown looks like a shockingly badly designed product, no? The design compels people to borrow money, and to pay interest on it, many years before they need it.

Which again raises the question, why is the bank selling people a product whose design means that it is not suitable to their needs?
 
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Brendan Burgess said:
These are fixed rate products so the early repayment fee would have been quite high.
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But they weren't fixed term products. The loan would be repaid when the borrower died, or at any time before that if the borrowers house was sold (trading down, moving to retirment home, whatever). At the time the loan is granted, these events are not predictable, With no fixed, or even expected, repayment date, how do you even define "early repayment" so that you can impose a fee?
 
TomEdison said:
Which again raises the question, why is the bank selling people a product whose design means that it is not suitable to their needs?
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The lack of competition means that periodic draw down products were not and are not available in Ireland. They are common in the UK.

This was probably due to the odd nature of the funding required for these products.

So you are a 72 year old with expenditure exceeding your income. What do you do?

Ideally, you would like a product where you borrow €10,000 a year. But these products were not available from BoI or anyone else. So you could just say "OK, I will turn the heat down and go to bed hungry".

Or you could borrow the money required for a few years and put it on deposit. It's an expensive way of doing it, but if it were me, I would do that rather than be hungry and living in the cold.
 
The concept of borrowing 10 K a year seems better than borrowing 100 K and drawing on it over 10 years.
However, would that mean a new loan application every year? That is a lot of work. For everyone.

Would it make sense, just spit balling, for the Bank to approval loan of 100,000 to be drawn down at 10,000 a year over a 10 year period.
Over such a lengthy period the banks business model will change, and the financial situation of the applicant would also change a lot.

In this case, presumably the applicant would’ve taken only the first 30,000. So that would’ve been better.

Not sure what’s in it for the banks really to agree to such a flexible product and commit themselves for 10 years.
 
TomEdison said:
Why not?
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I remember meeting the marketing and product team in the EBS which was a mutual society at the time. I said that many of their customers should have a lifetime relationship. Borrow money to buy a house. Pay it off. And then borrow again in their old age if the need it.

They were very clear. It just would not be worth the negative publicity. Everyone wants to borrow money but some people don't want to repay it. And repaying a loan 20 years later is particularly galling for the children or nephews and nieces of the people who borrowed it.
 
Interesting how my views have developed over the years. I used not to like Life Loans.


Brendan Burgess said:
One huge drawback of both types of loans is that they give you a big lump of cash now, whereas you might only want a few thousand a year. There are people paying 7% on their Life Loans while depositing the money at 2%. This makes little sense.

The children should investigate the possibility of extending their own mortgages and lending the money on to their parents. This way they need to borrow only what is needed and they will pay 3% interest rather than 7%. And it's much more flexible. If the parents trade down, they will be able to pay off the loan
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For anyone considering one of these life loans, Spry has a useful calculator that will show exactly how much will be owed in the future.
The standard fixed rate for anyone borrowing today from Spry is 7.25%
Using their calculator, if you borrow €130,000, at their standard fixed interest rate,
€552,774 would be owed after 20 years, €793,581 after 25 years.
https://www.spryfinance.ie/think-it-through/lifetime-loan-calculator/
 
Brendan Burgess said:
I remember meeting the marketing and product team in the EBS which was a mutual society at the time. I said that many of their customers should have a lifetime relationship. Borrow money to buy a house. Pay it off. And then borrow again in their old age if the need it.

They were very clear. It just would not be worth the negative publicity. Everyone wants to borrow money but some people don't want to repay it. And repaying a loan 20 years later is particularly galling for the children or nephews and nieces of the people who borrowed it.
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Back in the day when interest on a loan taken out to buy or build a house was (partly) tax deductible, this idea of a loan that you could draw on from time to time as and when your purposes required it was a non-starter; it would be difficult or impossible to identify the amount of interest attributable to the part of the loan drawn down for qualifying purposes, and the interest attributable to the part drawn down for non-qualifying purposes.

With the end of mortgage interest relief, that problem went away. But in fact most mortgages are taken out to buy a house, and you want all the money up front, so there wasn't much demand for a product in which you were approved for a certain amount, that you could draw down as and when required.

The argument you set out here is not really an argument against offering such a product; it's an argument against getting into the life loan business at all. (And, right enough, so far as I know EBS never did.)

But if you have decide to get into the life loan business, then what is the reason for insisting on lump sum drawdown of the full amount on day 1? I doesn't address the problem that EBS pointed to; in fact it makes it worse, as the case we are now discussing illustrates.
 
getting_on said:
To avoid stories like this one in The Irish Times probably would be a part of it, I'd say
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On the contrary, the failure to provide these products makes stories like this more likely, not less. We are readin this story because the borrower concerned drew down €100k that she did not need. And the reason she did this, it begins to seem, is that if she did not draw it down on day 1, when she did not need it, she would not be able to draw it down later, if she did need it.
 
Does anybody know, is it still the case with the Spry product that the borrower has to draw down the full amount at the inception of the loan, or can they draw it down over time as they require it?
 
Brendan Burgess said:
Not sure about that. I have a vague memory that you had to apply for a set amount and get that. You couldn't draw it down as you needed it. Or else there was a major disincentive e.g. another fairly big fee to do so.
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No there does not seem to be a product whereby you drawdown say 10k a year. The reason is this product is specific, you need to drawdown the money like a mortgage. You need legal advice as you are signing legal documentation. What you can do is borrow again later. But to do so you have to borrow the amount of the current loan outstanding, and also stick to the percentages allowed for your age, plus you need there to be enough equity.

Posters have mentioned high interest rates. They are not high, it’s not a normal mortgage, the banks have to borrow the money at a certain rate, they have to forego interest for a number of years, they do not know how many years, they cannot get back the full amount owing of the loan is higher than house sale value. So that’s why the interest rate is higher than normal mortgage rates.
 
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