Janine Starks explores some options for an asset rich, cash poor octogenarian couple in great nick but in need for a new car.

Janine Starks explores some options for an asset rich, cash poor octogenarian couple in great nick but in need for a new car.

By Janine Starks*

From my mailbag:

We are a couple in our 80s with good health, but our car is ancient and dilapidated.   We need to replace it, but we are cash-poor and asset-rich.  We get along perfectly well on our pension and don’t need any more income.  We have $45,000 set aside for expenses such as dentures, glasses, hearing aides and two funerals.  Should we buy a new car from our savings or prise the $25,000 cost from the house, with a loan repaid from our estate?

It’s wonderful to hear the engines are humming and all pistons are firing inside those 80 year old bodies.  Apart from the minor servicing needs of ears, eyes and teeth, you seem very lucky on the health front and managing nicely on your pension. 

The old bomb in the garage may have reached its use-by date, but you can’t let that curtail the fun of the best years of your life.   

Putting aside the lotto ticket solution, here’s a list of options to weigh up:

1. Attack your savings

You have savings, but a good chunk has to pay for two funerals (around $18,000) and with good health you could easily be around in 10 years.  While $45,000 sounds like a decent amount, it reduces to $27,000 net of funerals.  That’s easy to chew through with extras, maintenance and appliances blowing up.  So you risk getting in a pickle if you use this money to replace the car – to suggest otherwise, would be irresponsible.  But before jumping straight into bed with a Reverse Equity Loan, you could consider some more inventive alternatives.

2. Savings now, loan later

You could consider using your savings to buy the car and take out a loan in a few years time (when the remaining cash reserves are running low).  Given the interest rates are higher than a mortgage, these loans can inflict some damage on your families inheritance.  The advantage is to delay the higher interest charges.  The disadvantage is that in a few years time, taking out a loan might seem too stressful or confusing with age.  If the pot runs dry and family have to step in, you’ll feel helpless. 

If you choose this path, think about discussing the issues now with your children and solicitor, with consideration given to a Power of Attorney to deal with a loan if it seems too much to handle.  It might feel uncomfortable, but my guess is your children will have the utmost respect for your ability to think ahead.

3. Family front up for free

Instead of borrowing from a financial institution, consider whether your children would prefer to help.  It might feel awkward, but being transparent can be quite liberating. At the end of the day your home is most likely to be split between them (less amounts going friends or charities). 

The alternative is to say nothing and imagine your children sitting in your lawyer’s office being told Mum and Dad took out a Reverse Equity Loan 15 years ago.  Technically they should have no issue with it – you don’t need anyone’s permission, and it’s most rude for any child to pre-calculate an inheritance.  But think of the child who sits there with a lump in their throat, wishing they could have purchased the car and made it easy for you.    

All you have to do is raise the idea of a Reverse Equity Loan and its pros and cons.  That gives ample opportunity for any offer to come forward and it also leaves children completely aware that the value of the house is not going to remain intact, eliminating any surprises. 

4. Family earn interest

Another more innovative idea is to offer family the opportunity of earning interest themselves.  Rather than pay an institution, one child might like to keep the profits in the family.  It’s wise to inform other family members of the arrangement as the no-surprise attitude keeps everyone happy.  Other children need to be clear it was not a gift.  Wills can be adjusted to protect the child making the loan, to ensure it’s repaid with interest, prior to the remaining value of the home being split between them.  You must see a solicitor for advice.      

5.Reverse Equity Mortgage

If you borrow the $25,000 lump-sum (using the house as security), interest clocks up, but nothing is repaid until the house is sold on your death (sometimes called ‘Equity Release’ loans).  While they attract criticism in some quarters, without these loans thousands of retirees would be trapped without access to money.  Where they pinch, is when young borrowers (e.g. in their 60s), withdraw large amounts.  If they survive 25 or 30 years, the eventual loan repayment can destroy much of the value in their home.  On the flip-side, those who are older, and borrow small sums, find the effects of compound interest far more manageable and it might be offset by house price rises. 

A number of providers exist with a few examples being Sentinel currently charging 6.7 percent interest, SBS Bank at 7.1 percent and ASB at 7.25 percent.  The rates are roughly 1 to 1.5 percent higher than a standard variable mortgage.

As an example, a $25,000 Sentinel Lifetime loan:

·       Costs $1,200 to set-up, $125 for top-ups and $395 to release

·       Interest compounds at 6.7% (long-term average 8.95%)

·       After 10 years the loan value will be $51,000 (6.7 percent) or $64,000 (8.95 percent)

·       After 20 years it increases to $100,000 (6.7 percent) or $156,000 (8.95 percent).  Surviving that long, makes for an expensive car. 

·       A $350,000 house would increase to $426,000 in 10 years with 2 percent house price inflation each year ($76,000 gain)

As can be seen, a $76,000 capital gain on your home over 10 years would offset the $50-60,000 loan repayment from your estate.  But never bank on it – I’ve held property that didn’t increase a cent over 7-8 year periods.  Any asset can stagnate or fall in value. 

Even if gains do offset the loan, inflation will eat into the value of your children’s inheritance.  While I feel obliged to point that out, I’d also question why anyone would feel guilty about it.  Any child expecting you to curtail your lifestyle to provide them with an inflation proofed inheritance is a grownup brat. 

You can read about all the pros and cons at www.sorted.org.nz and Consumer have a 2009 report which is available for $10.  Sentinel has a calculator on their website and you plug in the amounts you might borrow and see what the repayment would look like from your estate.  Good luck with your decision and enjoy those new wheels.    

Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt.  Anonymity is guaranteed.   

*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer.  These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.

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May I gently suggest a cheaper car? I understand that you probably want a new car, or at least a car that will last you for the rest of your lives, but you could achieve either or both of those outcomes for significantly less than $25,000.

Why not consider a good second hand car.  Say something about 2007 with 40,000 km for about $10,000.  Should give at least 10 years reliable use. Your trade, some savings and a little bit of family help should get you there without lining the pockets of the banking industry.  We have found that passing cars between different members of the family can be less expensive than enriching car salesmen and keeps good cars with a known history.  Is there a teenager or student grandchild who could use the old car; are there children or their spouses with a car that would suit the parents.

Totally agree with the comments above, I purchased a nice little reliable Toyota Corolla hatchback with low k'ms in goold condition for $8,000 and sold my old car for $1,500, used $1 Trademe auction (your couple could ask family members to help them if they don't feel comfortable doing this),  It's surprising how much old cars can sell for using an auction.  So the total cost of a car with years of life left in it -which costs me nothing much to run or maintain was $6,500 - very affordable using their savings.
 

Absolutely agree. I bought a Toyota Corolla Diesel with 400K on the clock for $2K, although that was cheap from a friend, drove it for six years and another 200K before selling it for $1700. Probably a couple of $K in repairs over the years, but since these people are in retirement perhaps they could use the spare time to learn how to do the repairs themselves.
 
A Corolla or a Camry will save their initially higher purchase price many times over by simply being reliable. Even the petrol versions will do 300K with little trouble, whereas most are past their use by at 200K.

I know this geezer called Arfur, who has a mate called Terry. Would a nice Ford Capri be of interest? (Just saying because I saw one this morning, was tempted to hot-wire it there and then, will keep my eye out now I know there's a buyer. However agree with comments above, go 2nd hand and if you live in ChCh, get a 4wd ready for when Ole' Bucky kicks up again. And 3 and 5, frighten the kids, they deserve it. Think how many times they have frightened you ...)

Buy an $18,000 car from savings and take out a Funeral Insurance to cover both of you. The premiums should be quite affordable and can be paid out of your incomes. 
Another advantage of this kind of insurance, is that it is not counted as an asset, when you are assessed for rest home subsidy.
Stay away from Reverse Mortgages.

Another thing to remeber is that a reverse mortgage intorduces another party to the equation. What happens when something goes wrong? Like an earhtquake or a fire that destroys the home. Then the elderly owner is only a part owner. The issuer of the reverse mortgae is another part owner. Interesting discussions will follow. They may want their share out of any insurance proceeds. What is left may not be enough to buy another property and the eolderly previous property owner is thrown onto the rental market at a very vulnerable time in their life.

In the nicest way may I suggest you re-take your driver examination, no point owning what could turn out to be an expensive piece of garage furniture if the authorities suggest your licence is revoked or not renewed
It may be you have decades of living but only afew years of self drive mobility - and going off the numbers above an expensive car plus maintenace, insurance, fuel etc buys lots of taxi trips - and there is always the gold card for free off peak travel
i would also suggest to stay away from reverse equity loans - they might have a small bite but they have very sharp teeth cutting into your future ability to do do as you wish
but still on saying that, have a look on trademe - I helped get a toyota camry for my mother in law to replace her big ford fairmont - a still sizeable car but the right size for someone not yet ready for a tiny bubblecar. being a second hand (or pre-loved) car the many thousands of dollars saved on purchase price far outweighed buying a new super fuel efficent toy car 
airbags, comfortable seats, the right height for getting into and out of, good all round visibilty, and reasonably cheap to service - it really was for her situation the best way to stay independant and safe.
President of Property

Suggesting a reverse equity loan is somewhat irresponsible. They erode any capital that has been built up during a lifetime - why give that to a bank.  Reverse Equity loans should only ever be used for absolute extreme emergency situations.