The permanent home, for most people, is the largest capital asset that they own. When income is limited, perhaps due to a static pension and increasing expenses, people can turn to ‘equity release’ and opt to sell their property whilst still having the option of living there. What are the pros and cons of freeing up your capital in this way?
‘You can’t take it with you’ – the well-known phrase usually targeted at those who have stored a large number of assets and are anxious to keep hold of them in their older years. For many people at the present time, this phrase resonates. Perhaps living in a large property that has a high market value, with increasing inflation and limited spending power – how attractive is the idea of handing over bricks and mortar for extra money needed now?
Equity release or ‘nuda propiedad’ is a tempting alternative for those wanting to feel the benefit of their assets before they die. It allows you to sell your house through a single payment or in installments whilst still continuing to live there until you die. At this point the house becomes the property of the ‘nudo propietario’.
It may not be that the owner themselves is wanting to feel the benefit of this additional cash. In these uncertain times many grandparents are being called on to help support their struggling families. Grandchildren may need university education, children may be having difficulties making ends meet. It may not only be an extended range of holidays that this extra capital could allow, but sustaining the younger generations too.
Whatever the motive, equity release is becoming more popular and there are an increasing range of options being promoted. Let’s take one example:
Your house is valued at €282,000 in the region of Alicante. You are a resident in Spain and an owner-occupier who has no outstanding mortgage but at 65 years old your income is limited. You could sell the ownership of the property (and keep the right of use) for an amount between €126,500 and €217,000. A 95-year-old owner would get a higher release – between perhaps €220,000 and €269,600. The older you are, the more you can expect to receive and single occupants will attract a higher settlement than when the property is co-owned.
The right to live in a property until you die is called a usufruct and there are lots of different options in terms of whether the property is paid for through monthly installments, a lump sum or a combination of both. What makes the biggest difference to the amount you can receive is the age of the owner-occupant. If you are between the ages of 65 and 69 you could expect to receive between 65% and 75% of the value of the property. At age 95, 95% could well be realized. Other factors are also taken into consideration such as the number of owners and to get an accurate prediction you need to consult a property expert who deals in these matters. Valuations are carried out by Tinsa which is a Spanish national, independent valuation company.
It’s not just elderly people who can benefit from this type of arrangement. Younger people who are struggling financially can consider a temporary usufruct to tide them over the more difficult times until their financial fortunes improve.
A similar concept operated by banks is that of the reverse mortgage or hipoteca inversa. This is also a form of equity release that means homeowners can borrow money set against the value of their home. The property is used as collateral and the bank’s loan is secured. This is usually an option for retired property owners over the age of 65. Just as with equity release, the debt is paid once you die.
The pros to consider
As they say; ‘you can’t take it with you’ and being surrounded by your investment without having the funds to enjoy it can be frustrating. There are a number of flexible options that can allow you either an additional regular income or a lump sum to invest in something you’ve always wanted, medical bills or to help out a family member who may be struggling.
Rather than selling your property and perhaps moving into rented accommodation, you are guaranteed to be able to live rent free in a property which you will always consider your home. You will still have that sense of home ownership even though, technically, it isn’t yours. In some cases, the money you receive will be tax free and you don’t have to pay advertising agents and the other ‘on costs’ that can make buying and selling property in Spain more expensive.
The cons to consider
Perhaps the biggest disadvantage is that of inheritance. If you had prided yourself on having something to hand over to your heirs when you die, then this obviously makes a difference to what they can expect. Having said that, there’s also something to be said for making the money work for them sooner rather than later. Perhaps they are wanting to invest in a business of their own or need a deposit for their own house.
If you were to die shortly after the transfer is made then your inheritors would lose out and you wouldn’t have had the benefit you were anticipating. As you would expect, the amount you will be paid will be less than its market value, particularly if you are at the younger end of the market.
In the end, equity release isn’t for everyone. However, it’s an increasingly popular option if you’re a resident homeowner in Spain and wish to make a difference to your life and your family’s life, now.