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

TomEdison said:
As for borrowers living longer than expected, the lender can't know which particular borrowers will do this, but it can know that a proportion of them will, and it must account for this in the algorithm it uses to calculate the percentage of the house value that it will lend and the interest rate that it charges. The larger the pool of borrowers, the more reliably this can be done.
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Exactly. The interest rate depends on the likelihood of going into negative equity and the chances of negative equity depends on how much is borrowed as a fraction of the house price.

If the loan is a small percentage of the house's value, then the bank is unlikely to end up losing interest at the end. It is a high security long term loan.

The requirement of negative equity protection means that the interest has to be higher, or the max loan has to be lower.

A 25% loan where the interest grows at 3% faster than the house would go into negative equity after around 40 years.

In theory, a pensioner with only 10 years life expectancy could decide that they want a 50% loan and is willing to pay higher interest. In the unlikely even that they live more than 20 years, the bank would effectively get no more interest.

It could even be the direct rule. You pay x% interest for 20 years, or until death, whichever happens first.
 
LarryScott said:
The interest rate depends on the likelihood of going into negative equity and the chances of negative equity depends on how much is borrowed as a fraction of the house price.
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Bear in mind this this is looked at across the whole loan book. They have expectations about house prices, mortality, interest rates, etc. They set their interest rates and LTV ratios to give them an expected return on capital based on their assumptions. If more people bought this product, or if there was competition in the market, the inputs would change and the interest rate would accordingly change.
 
ClubMan said:
A lifetime loan is secured on one's home.
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The security is unenforceable for an unknown period of time. A personal loan has regular repayments which reduce the sum at risk. A lifetime loan has an increasing sum at risk. While both quite different, they are quite similar in how their risk is higher than a housing loan secured with a mortgage.
 
The financial risk is quite low on these loans. Much lower than on a family home loan.

But the nature of the funding is very different.

Long term - but not with a set repayment date.
Interest-rate risk. The rate is fixed for the term of the mortgage which itself is uncertain.

Very few funders want to get into this business.

But although the financial risk is low, the reputation risk is high. And if they are a mainstream bank, it negatively impacts their other business.
 
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