Saturday, 26th May 2018
FINANCE & INVESTMENT Article
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Equity release What can it do for you?

Equity release What can it do for you?

The words are financially fashionable at this present time but what do they really mean? There are many uses but the more popular ones deserve an explanation so that the expatriate here in Spain can properly evaluate the advantages and disadvantages of su

The  first, and obvious facility, is to have SPENDABLE CASH. A bank lends money on unencumbered property and allows some cash to be released to the property owner. Normally, this is restricted to a maximum of 25% of the loan, which can be up to 100% of the property value. The loan is “interest only”, and the interest is payable by way of a deduction from an investment portfolio set up and managed by the lending bank. The minimum investment into such a portfolio is normally €250,000, which means that the property should ideally have a valuation of around €350,000. The investment portfolio is designed to produce more than the interest due on the loan, and so therefore provides a potential for a small surplus income to the borrower.

The second, and not so obvious, is to clear existing mortgages, TO BE FREE OF MONTHLY MORTGAGE PAYMENTS. This can only be achieved where the balance of the outstanding mortgage is less than 25% of the property value. The property must have a value in excess of €375,000 for this to work. This facility is similar to having spendable cash, as above, but the cash is used to settle the existing debt on the property. The remaining loan monies go into an investment portfolio. The portfolio is set up and managed by the lending bank in order to pay the interest due on the loan, which is “interest only”. Again, there is potential for surplus income where the investments perform effectively.

The third facility is to GENERATE INCOME. A bank lends up to 100% of the property value and this is invested into an income generating investment portfolio. The portfolio generates sufficient to pay the interest charged on the loan and provide the property owner with a modest income, (or capital growth in the investment if income is not taken).

Further advantage can sometimes be gained if the bank will allow you to draw down the loan in other currencies. A good example is Swiss Francs, where the interest rate charged is about 1.25% less than the rate charged for Euros. However, it must be remembered that there is a risk of increased costs if there are adverse movements in exchange rates.


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In all of the above examples the lending bank registers a charge on the property with the land registry. Effectively this means that there is an indirect benefit to the property owner, which is a substantial reduction in potential inheritance tax. Spanish inheritance tax is calculated on an asset’s net value. Therefore after a charge is deducted from a property value it leaves much less to be taxed.

A word of warning….a number of schemes are available on the Costas, and whilst all are secured on property, it is worth investigating the investment element, which after all is the most important part, because if its value falls significantly your home could be at risk.

If you are considering any of the above objectives, our advice is simply that before you become involved you must fully analyse the investment product being offered. Check the track record of the underlying investments. Are there guarantees? If so, be fully aware of what you have to sacrifice in order to have such guarantees. Is the product designed for “experienced investors”? If you are not an experienced investor you should investigate the additional risks very carefully.

Further, you should fully acquaint yourself with all the costs of setting up such a plan, together with the costs of getting out later if you want to sell up and move on etc. Also, what are the ongoing maintenance costs that you will incur? Some costs can come as an unpleasant surprise if you have not learned of them all at the outset. The small print normally reveals all but you should take the trouble to read it.

We at Graydon & Associates only introduce clients to the most reputable of banks, who in turn use only the safest products which are fully regulated and approved in the jurisdiction concerned.

 



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