Hi, I'm confused with how the repayment of capital and interest for this product works. Generally, the capital and interest will be paid back if the borrower dies, enters long-term care or sells the property. But how does the bank guarantee the accumulated amount gets paid back for each of the scenario? 1. Borrower dies - who is liable to pay back the loan? Is this due to the property being returned to the bank and the bank will sell off the house with the same amount as the capital and accumulated interest? 2. Borrower enters long-term care - I am understanding that like any other loan, once this scenario happens, the borrower just pays back the amount accumulated? 3. Borrower sells the property - similar approach as #1 but the borrower is the one selling off the property and uses the amount received to pay back the loan. Is my understanding above correct? Also to add on is why would longevity be a risk to the bank? I understand that as long as none of the three scenarios mentioned doesn't happen, the bank won't be able to get back the loan amount which is a risk that it'll be a long time before they get the return. However, the solution in the ASET states that "the sale of the house may not cover the initial loan and interest owed to the bank". Does this imply that with longevity, the interest will grow so much that even if one decides to sell the house, it would be unmarketable to do so at the price of "initial loan + high accumulated interest" and to make sure it can be sold, the price will be set lower than that amount?
Hi Carmen Some answers that will hopefully help.... Regarding the bank getting back the accumulated amount in each scenario you cover, I think that this will generally be done by selling the house and using the proceeds with the borrower supplementing the proceeds of the sale, if necessary, to pay off the loan given it's secured on the equity in the property. However, if the borrower could pay back the loan without selling the house then they could do this. There's a risk for the bank to the extent that the house sale price does not cover the accumulated amount owed and the borrower, or their estate, cannot cover the balance of the loan over this. (There is no security beyond the equity in the property.) This risk is increased with greater longevity - there is a greater risk that, as you say, the accumulated amount of the loan will exceed the value of the house; and also a greater risk that the borrower, or their estate on death, will not have sufficient other funds to make up the difference, if needed, as these will be reduced more before death. Hopefully this makes sense.
