What is Home Equity: Introduction, example and overview-2

This is part II of article What is Home Equity: Introduction, example and overview - 1. Please read this article from part I before continuing with this part

How? That’s where home equity comes into picture.

At 58, when you retire from your job, you approach a home equity finance company like Citibank or Standard Life Property Management. You tell them your situation, your assets (house) and ask them for a home equity plan, which can give you regular monthly income till you die. They visit your house, do an evaluation of the house and then come to a market value of your house. Depending upon this market value, your habits (like smoking), pre-existing diseases, etc., they quote a monthly income to you.

If you accept that offer, then in return you have to sell your house to them, not immediately, but as a “HOUSE EQUITY” – meaning, you sell the house to them as home equity, but retain the possession of your house till you die. Hence, the home equity plan can offer you a very good income at the age when you are no longer able to work. It is called Home Equity,, because like in equity shares, though the shares are sold to the shareholders, the ownership and functioning of the company is retained by the management. Hence, the same concept applies to selling home as equity.
After your death, the home equity company with which you made the contract, will takeover the posession of the house and may rent/sell/lease the house and take monetary advantage.

It all sounds good but the biggest problem with home equity plans is that you cannot leave anything for your family members, once you die. In countries like India, it is quite common to see children becoming rich just by inheriting the parents properties. If the parents decide to go for home equity plans, then the children will not get anything. Even your spouse cannot continue to live in the apartment once you die. He/She too should find something on her own or you must sign the home equity contract jointly, so that even if one of the partners dies, the posession can continue.

The home equity concept is pretty common in western countries, the reason being the social and family life. People like to stay individually, no family commitments, no concept of inheritance of wealth. The concept is “Live today and live for yourself”. It suits well if you believe in that lifestyle.

However, home equity is becoming quite common in India too. The reason is that children now are moving out of their native towns in search of jobs. There has been a major relocation drive. Hence, the parents are now finding it useful to use their property to earn the extra income during the retirement period.

Another issue with home equity plan is that there are not much competition among different firms, as the market is just opening. Hence, people are not getting fair value deals for their house.

The market is still unregulated; hence it’s only between you and the property firm.

Real estate price fluctuation is another major concern.

Another bad news is that people, who are healthy and have maintained a good healthy balanced life throughout their life, will NOT receive good retirement income, because they are expected to live longer. On the other hand, people who smoke, drink and have all kinds of pre-existing diseases will earn more retirement income.
The reason is that the home equity company wants the duration of retirement income payment to be as short as possible. The more diseased a person is, the shorter will be his life span (post retirement) and hence the less no. of monthly payments the property company will have to give him. May be a bit unethical, but that’s how the market works.

Ultimately, by the time you retire, you may see a lot of companies offering this kind of schemes. You never know whether the next generation of kids will be worth inheriting something from their parents, or will our social system (to a certain extent) change such that it may make present day salary earners to go for home equity plans.
Keep watching, markets are developing fast!