Equity Release Repayment Penalty?

John_Patrick_2

I wonder if anyone is able to offer an explanation / advice / suggestion to the following problem I have?

In June 2000, we took out an equity release (Fixed Rate Lifetime Mortgage) amount our house, with Norwich Union. We now think that we were badly advised, but that is water under the bridge. The loan was for £41,400 less £500 fee, we actually received £40,900, at a fixed rate of 8.25%. At the time we took it out we were both retired and thought that we would be living here for ever? We did not envisage ever having to repay Norwich Union? However now that we are in our 70's we have become a lot younger and have decided to sell up and move to Spain. There is no problem, we have our house on the market and have a Spanish villa lined up.

However when I requested a redemption figure from NU I was amazed to find that not only has the amount increased to almost £65,000 with all the interest etc., which I have to accept. There is also a figure of £4,500 which they call an 'early redemption charge'. Apparently this charge is raised if the '6% Treasury 2028 gilt yield', falls more than 0.12% between the completion date (20/06/00) and the repayment date. The gilt yield on the completion date was 4.45% and was 3.92% on the 14th January last. This makes the redemption figure almost £70,000!

Can you please explain (a) Why our loan if we wish to repay, has a repayment penalty based on a gilt yield, when we have been paying a very handsome interest rate from day one? (b). What are gilt yields, are they likely to continue dropping? If so should we repay ASAP. We will need to repay to obtain the house deeds to sell. They will not transfer to a Spanish property.

Any comment you are able to make would be appreciated.

John R Patrick

silvercar

A thread on a similar topic - may be worthwhile reading some of the links:

http://forums.moneysavingexpert.com/showthread.html?t=143806

Hopefully your scheme was part of SHIP and so you are protected from negative equity.

I would address the questions about gilts to the person that advised you? was he trained in this area?

John_Patrick_2

Thanks, luckily there is not a negative equity problem but unfortunately the person who sold us the plan is no longer available.

EdInvestor

Hello John

Equity release has only just started to be regulated and this is the kind of thing that tells you why it should have been done some time ago. It seems clear you were not advised that the redemption penalty was based on gilt yields - or at least what this meant.

Gilts are government debt.The "yield" is the interest which the Givernment will pay on the loan to the investor. Gilt yields ( and prices) move with interest rates and thus have been falling in recent years ( annuity rates are based on gilt yields, so perhaps you have noticed it there.)At the moment gilt yields are falling even more than usual, because there is huge demand for gilts from pension funds trying to cover their liabilities.

Can you please explain (a) Why our loan if we wish to repay, has a repayment penalty based on a gilt yield, when we have been paying a very handsome interest rate from day one? [/url]

The interest is on the loan, not on the redemption penalty.

(b). What are gilt yields, are they likely to continue dropping?

See above, probably, though you never know with capital markets, they can be very volatile.

If so should we repay ASAP. We will need to repay to obtain the house deeds to sell. They will not transfer to a Spanish property.

It's a bit hard to say. The yield has fallen so much in recent weeks that it has caused a great fuss of the "something must be done" variety.If something is done, then the problem could go away.Not an easy call.

Who sold you this equity release plan?Was it an IFA or an NU salesman? If the latter, it might be worth writing to NU ( which owes a duty of care to its customers) complaining that this gilt yield risk wasn't properly explained to you (I'd have thought it would generate a misselling claim if done now) and asking for a reduction in the penalty. After all NU have done quite well out of the 8.25% interest rate, haven't they? :rolleyes:

John_Patrick_2

Thanks for your very interesting reply. It is all starting to come in place now? When I look at the 'small print' in my N.U. contract I see the part which mentions the Gilt Yield Penalty. If only someone had told me 5 years ago? But then I was told that 8.5 was a good interest rate!!!

EdInvestor

But then I was told that 8.5 was a good interest rate!!!

It probably was at the time. The lesson from this is that anyone taking out an equity release "lifetime mortgage" should watch the redemption penalties closely, because the chances are you'll either be wanting to get the money out, as John does, or remortgage to a lower interest rate when this becomes available (you can get under 6% now for equity release, and rates should continue to come down as demand grows for the product.)