The couple must who must pay Aviva £135,000 if they spend their last years together
Equity release has never been more popular. But beware the crippling hidden costs
AFTER more than 60 years of marriage, Roy and Jean Tamplin were suddenly faced with a heart-breaking decision.
Roy’s health was deteriorating quickly. Jean’s eyesight was also failing, and she needed help with day-to-day tasks. It was clear that Roy, in particular, needed full-time care.
But when they came to sell their house to move into sheltered accommodation, they were given a devastating ultimatum by insurer Aviva.
It said the couple would have to pay a £16,430 fine if they wanted to move out of their home and stay together.
The Tamplins had fallen foul of small print on the equity-release loan they had taken out on their property 11 years previously.
It stated that they would have to pay an early-redemption penalty if they wanted to move into care from their bungalow in South Wales — at any time — unless both of them needed to go into care. Aviva decided that while Roy qualified, Jean did not. As a result, the fine would apply.
Not only this, but the £42,900 they had originally borrowed had ballooned to £119,391 since 2003 because of the crippling effect of compound interest charges. It left them needing to use savings and borrow from their children in order to afford the sheltered accommodation.
Roy, a retired accounts manager, says: ‘It was a bolt from the blue, which has stung us horribly — it’s a scandal. There was no explanation at the time of any kind of exit fee, or that it would cost a fortune.’
Roy and Jean, now both 83, had released cash from the equity in their home because they wanted to buy a boat to enjoy in their retirement. They had lived in the same maisonette for more than a decade, and had seen its value soar from £75,000 when they bought it 11 years earlier to £120,000.
In 2003, they saw a financial adviser and borrowed £42,900 as an equity-release loan, at 7.1 pc, from insurer Aviva.
They bought a 29ft Rodman motor cruiser and christened it Rob Roy. In 2008, they sold the boat — and, later that year, moved house, taking the equity-release loan with them. Then, in March last year, they decided to move into sheltered accommodation. It was then that they discovered they would have to pay £119,391 in debt plus the penalty fee of £16,430.
Although the value of their property had increased to £249,000, they were left with just £113,179. So the Tamplins complained to Aviva.
However, it rejected their case. It said its contract was clear: they both had to qualify for care for the fee to be waived.
Jean says: ‘We didn’t want to leave our home; we loved it. But at our age, and with our illnesses, we had to be somewhere more appropriate for us. Now we have lost a huge part of our savings. We feel cheated.’
DEBTS THAT DOUBLE EVERY DECADE
EquITy release is a type of loan that allows older homeowners to cash in on some of the value of their home.
And the market for equity-release loans is growing rapidly. In the first six months of this year, borrowers took out equityrelease plans worth £710 million — an 11 pc increase on last year, according to figures from the Equity Release Council.
Increasingly, many are giving the money to children to help them get onto the property ladder, or are helping grandchildren by paying for student fees. The loans have also soared in popularity in recent years among older homeowners looking to boost their retirement income.
Many have made a packet after property prices soared, but find they are not able to enjoy this wealth — some aren’t ready to downsize, or can’t find anywhere affordable they want to buy and move to.
So the only way to release cash from their property is to take out an equityrelease plan.
It works a bit like a mortgage. Firms charge an interest rate for the money you borrow, and the amount you can take out of the value of your home is based on your age and how much equity you have. The average amount is around £70,000, which is paid out as a tax-free lump sum.
But, unlike a mortgage, traditionally borrowers don’t make any repayments towards their debt. Instead, they pay back what they originally borrowed when they die or go into care.
However, concerns are growing that thousands of people who took out loans may not realise the sky-high costs of the debt. Last month, the Mail revealed how 80,000 older homeowners face hefty fines of 25 pc or more if they move house.
Others do not realise that compound interest means their debt can double in a decade.
THE BURDEN OF COMPOUND INTEREST
INTEREST rates on equity-release plans taken out today tend to be set at a fixed rate of 6 pc.
However, older policies charge between 7 pc and 9 pc.
This may seem high compared with a traditional mortgage but, compared with the interest an older borrower may pay for a personal loan, it’s actually pretty low.
The problem is compound interest. Because borrowers have historically never paid back any interest on their loan, it rolls up year after year.
Say you borrowed £50,000 at 8 pc. In the first year, you would accrue £4,000 interest.
In the second year, you would then pay interest on the original £50,000 plus on the extra £4,000 that your debt had increased by — so total interest of £4,320. This is added to your debt, too, bringing it to £58,320.
In the third year, you would be charged 8 pc of £58,320 — £4,665.60 — and this is added to the debt, too.
It means that, after just three years, your original debt has grown to £62,985.60. After five years, you’ll owe £ 73,466.40 and, after a decade, £107,946.25 — more than double the original amount you borrowed.
Today’s equity-release plans from members of the Equity Release Council have a guarantee that you will never owe more than your house is worth.
However, plans taken out in the Eighties and early Nineties didn’t always have this guarantee.
Seven years ago, Sheila Palmer was struggling to survive on a small pension. So the 86-year-old widow, from Radcliffe-on-Trent, Nottinghamshire, took out a £38,000 equity-release loan from Aviva, at a fixed interest rate of 6.89 pc. Her one-bedroom flat — one of eight in an upmarket residential building aimed at the over-50s — was then worth around £64,000.
She used some of the cash to buy a car, so she could visit friends and do the shopping.
But when she opened her annual update from Aviva last week, she burst into tears. For her £38,000 loan has become £65,608. While Sheila had understood the debt would grow, she had no idea to what extent.
And now the unexpected burden has left her fearful for her finances and triggered a huge rift with her family, who have effectively seen their inheritance wiped out.
Sheila, a former nurse, says: ‘No one told me I should talk to my family, no one told me about the terrifying size of the debt and no one told me about the compound interest.
‘The debt — which will wipe out the £70,000 value of my home — means there’s nothing I can leave for my son and grandchildren. When I die, the money will be used to pay it all off.’
FINED IF YOU WANT TO MOVE HOUSE
WHEN a couple who have taken equity release die or go into care, their house is sold and the debt is paid off from the value of their property.
But if they want to move before this, there is typically a penalty fee, known
as an early redemption charge. And it is catching out increasing numbers of borrowers. In many cases, especially on older policies sold in the late Nineties and early 2000s, charges can run into tens of thousands of pounds. Fears are growing that these families are effectively trapped, because the fine would wipe out a big chunk of their wealth. Some insurers, such as Partnership Assurance and Aviva, charge early repayment charges linked to gilts — also known as Government bonds. When gilt values fall, it can trigger a hefty penalty, which is usually capped at 20 pc or 25 pc of the original loan advance. So a householder who took out the average- sized £70,000 loan would pay £17,500. Other insurers, including LV= and Scottish Building Society, charge a set sum, which reduces over time. Here, on the same £70,000 policy, there would be a 5 pc levy if you left within the first five years; 3 pc between years six and ten; and nothing thereafter.
WHY COMPLAINTS ARE SOARING
YOU can take out equity release only if you have seen a financial adviser, who should explain all the pros and cons. But the problem is that when many policies were sold, those taking them out failed to take account of increasing life expectancy. A couple who thought they might die after five years are now living for years longer, so their debt is far greater than they’d anticipated. Also, older couples who previously would have gone into a nursing home now find they want to move in with relatives later in life, because the cost of care is too high.
Or they want to move into sheltered accommodation, rather than a full nursing home. The problem is that selling in these situations triggers the early redemption penalty.
An Elderly Accommodation Counsel spokesman, says: ‘Traditionally, when the time came for care, you would simply move into a straightforward residential home. But this has become a very grey area.
‘Today, there’s huge demand for flats and apartments in care villages — usually with a warden. This type of accommodation could easily be classed as an ordinary residential property, which would mean the customer is charged an early repayment fee.’
As the popularity of equity release has risen, so, too, has the number of complaints being made to the Financial Ombudsman Service. Over the past year, more than 200 have been made.
Officials are now keeping a close eye on the industry to gauge the type of problems that are most commonly cropping up. Last year, the Ombudsman published a dossier revealing the severity of the grievances felt by equity-release customers — it found in the customer’s favour in five out of six cases.
An Ombudsman spokesman warns: ‘Even with tighter controls on deals to release the equity in property, the way these products work can be difficult for people to understand.’
HOW YOU CAN KEEP DOWN THE COSTS
EqUITY release has taken enormous strides forward to make it more transparent. Those who want to take out a plan have to see a financial adviser, and are encouraged to consult with their family.
It is regulated by the Financial Conduct Authority, and some 400 firms are part of a trade body, the Equity Release Council. Newer equity-release deals offer greater flexibility that allows borrowers to pay off their interest as they go, stopping the debt spiralling.
On top of this, borrowers are also encouraged to take out bits of equity in chunks — say, £10,000 in one year, then £20,000 five years later. This will mean interest is not accruing on the whole amount from day one. The insurance companies that offer equity release say the reason costs can appear high is that, unlike with a normal mortgage, they don’t usually receive a penny in interest payments for decades.
Nigel Waterson, chairman of the Equity Release Council, says: ‘If, as a customer, you are not paying a penny to a lender for an indeterminate period of time, I think compound interest seems a fair way to do it.
‘This is because the true cost of equity-release borrowing is higher, since the provider can’t use repayments to generate interest income as they do with other financial products.
‘If someone lives for ten, 20 or 30 years, that capital has to be funded.’
A spokesman for Aviva says: ‘We are very sympathetic to Mr and Mrs Tamplin’s situation. However, a lifetime mortgage is not designed to end early and is set up based on certain assumptions of how long the product would be expected to run.’
Although the couple complained to the Financial Ombudsman, the case fell outside of its jurisdiction because the plan was sold before regulation, in 2004.
In the case of Mrs Palmer, the insurer says that it did explain all the details to her.
The spokesman says: ‘While we are sorry to hear that Mrs Palmer is unhappy with her lifetime mortgage, we feel that correct process was followed when the product was sold, and that we took steps to make sure all potential financial consequences of the product were explained.
‘This case has been reviewed by the Ombudsman Service, which agreed with our decision.’