‘He borrowed £65k on our home – now I owe £178,210’

Equity release is growing in popularity, yet those on older plans could be paying far over the odds. Adam Williams investigates

Homeowners with equity release plans are counting the cost of high interest rates and rolled up charges, with some facing the loss of every penny of equity in their homes. Equity release offers older homeowners the chance to take cash from the value of their home, with no repayment needed until they die or move into long-term care.

But some borrowers who took out plans in the 2000s, with rates often upwards of 7pc, are now paying fivefigure sums in interest charges each year. The way interest payments are calculated by equity release providers means that the cost of a policy can quickly spiral. Unlike residential mortgages, where a borrower pays off the interest charges each month, the interest on equity release loans is usually added to the overall debt. This “rolling up” means that the interest compounds, growing rapidly.

Some policyholders face seeing the entire value of their property whittled away by sky-high interest charges, leaving their children with no inheritance. One customer contacted Telegraph Money to say she was currently being charged £12,000 a year in interest on a £65,000 loan.

While the option to move between providers exists, some plans levy punitive charges of up to 25pc to dissuade customers from doing so. But in many cases equity release customers simply do not know that they can switch.

James Daley, of consumer campaign group Fairer Finance, said: “It goes to show the dangers of taking out

Shirley Rosenthal and her husband, Stanley, took out an equity release mortgage with Hodge Lifetime, then known as Julian Hodge Bank, in April 2004 on their property in Buckhurst Hill, Essex.

The couple released £65,000 from their home to pay for new windows, carpets and general home improvements and were charged a fixed interest rate of 7.15pc. This was negotiated by Mr Rosenthal, as he looked after the family finances.

Following his death earlier this year, the true cost of the plan became apparent to Mrs Rosenthal. The 79-year-old has been charged £12,261 in interest in the past year alone, a figure that will only increase in future years thanks to the rolled up interest charged.

Mrs Rosenthal now owes £178,210 to Hodge Lifetime on her £400,000 property. “When my husband died we started going through all of his papers and my daughter realised that we owe nearly half the value of our flat,” Mrs Rosenthal said. “We were horrified to see how much all the interest has mounted up.”

The amount owed will not need to be repaid until Mrs Rosenthal dies or moves into care, but at the current interest rate the entire value of the home will be eaten up in 10 years, assuming no growth in the property’s value in that time.

“When I pass, they will take the flat back. There won’t be anything left and no inheritance,” Mrs Rosenthal said.

Her daughter, Elyana Cohen, said she was “flabbergasted” when she found out the true cost.

“I can’t believe the interest they’re charging,” said Mrs Cohen. “My mother is 79 and is well. We want her to be around for another 10 to 15 years, but if she lives that long you’re just looking at how much more interest will be paid.” Mr Daley said this situation was