Thousands of pensioners who have utilised equity release loans to release money from their homes are now starting to realize how costly these products can be. For the schemes which do not require a monthly payment and where the interest is rolled up, the amount borrowed tends to double over a 10 to 12 year period. Hefty early-repayment fees are often payable when they sell their homes.
Equity release loans are popular with pensioners who are on low incomes but have seen the value of their property rise. Older home owners can take out a lump sum from the value of their property and then be charged a rate of interest which can be as high as 8.99%.
The loan reaches term when both home owners move into residential care or pass away. The balance of the loan is cleared from the proceeds of selling the property.
Over 80,000 couples who took out these loans over a decade ago have now found that their debts have more than doubled due to compounded interest charges.
If they decide to sell their home – perhaps because a spouse dies or they need to move into residential care, they are stung with early redemption charges which can be up to 25% of the original loan.
In one example, the Ombudsman was involved with the case of a Mrs R who borrowed £112,000 in 2005. When her husband passed away and she wanted to downsize, she was charged £246,000 to do so which included an early repayment charge of £28,000.
Fortunately, the Ombudsman found in her favor because it turned out that the couple had no need for such a product.
Over the past year, the Financial Ombudsman Service has received hundreds of complaints about these kinds of loans. Experts are now calling for an investigation by the City regulator.
Beverley Budsworth, Managing Director of The Debt Advisor said: “People considering the use of equity release loans need to seriously consider if it is suitable for them. The compounding interest and charges have the potential to seriously affect a person’s finances”.
Bev Budsworth added, “An elderly couple referred to us with significant unsecured debts which between them exceeded £200,000, had been talked into an Equity Release Scheme which had only released a sum of £7,000 to them. The broker had not carried out a full credit check and the individuals were that desperate for the money to pay their next installments on their debts, they had failed to disclose their debt. The £7,000 lasted just 2 months as their minimum payments on their debts totaled £3,500 per month. The couple ended up having to sell their property and the equity release provider charged a repayment premium of £15,000 to add insult to injury. In my view, this couple should have been referred for debt advice and not sold an entirely inappropriate product.
Bev adds, “It’s not that easy to understand the fine print. I would like to see much more stringent rules regarding the sale of equity release products which includes detailed analysis of the applicant’s financial position including full credit checks.”
Justin Modray from the consumer guidance website Candid Financial Advice said: “Some of the fees charged for an early repayment for equity release can be outrageously high. Sales commissions have been the root cause of most mis-selling scandals over the years and equity release is probably no exception.
“The time is ripe for the Financial Conduct Authority to review the sector, especially the oldest policies, to ensure that advisers put right any past mis-selling.”
Equity release loans are becoming ever more popular. Figures released by Key Retirement Solutions reveal that record numbers of people are turning the scheme. Between April and June of this year, £384M was released for 5,400 customers which equates to £4.2M a day being withdrawn.
If you are contemplating Equity Release to clear debt, please do seek advice first. There are a range of options which can help you clear your debt without the need to sign up to an equity release scheme which could see the sum advanced double over a 10 to 12 year period.
If you would like to find out more about the range of debt solutions that are available to you, call us today on 0800 0851 825 or use our contact form. Our advisors can speak with you about all available debt solutions such as Debt Management, IVAs, Bankruptcy and debt consolidation.