Has Equity Release been missold?

Collster

My stepfather and mother took out an equity release product 15 years ago at a fixed rate of 8.25%. He recently complained to the company who sold him the product claiming that he hadn't been made aware that the interest rate was compound rather than simple. I didn't know that he had made the call, otherwise I'd have asked him to show me the paperwork first. To cut a long story short, his illustration did clearly state compound. The company has rejected his complaint and I have no problem with the way they dealt with the complaint.


However, when I looked at the paperwork, I could see that the only financial advisor involved in the transaction was an employee of the provider. It was a requirement of effecting the product that my mother and stepfather take legal advice but it was never suggested to them that they take independent financial advice, which I am surprised about.


I do also think that the 8.25% rate is excessive. It seems very high and strikes me as taking advantage of people as they approach a vulnerable age. I don't object to equity release arrangements in principle - I think that they are an excellent way for people in retirement to access cash but 8.25% just seems ridiculous. I wish I had known where to go to get an interest rate of 8.25% on my investment 15 years ago.


I realise that I've only provided sketchy information but I'd be grateful to get comments about the way the equity release was sold and about the rate of interest. Is it still possible to take equity release without getting independent financial advice?

dunstonh

He recently complained to the company who sold him the product claiming that he hadn't been made aware that the interest rate was compound rather than simple.

That is a strange assumption as the illustrations would show compound and the documentation would explain as such.

However, when I looked at the paperwork, I could see that the only financial advisor involved in the transaction was an employee of the provider. It was a requirement of effecting the product that my mother and stepfather take legal advice but it was never suggested to them that they take independent financial advice, which I am surprised about.

It is not a requirement for a borrower to seek independent advice. Going direct to provider is allowed.

I do also think that the 8.25% rate is excessive.

It's not far off the norm. Remember that the rate tends not to go up as much either during periods of higher interest rates and there is a cap on how much the lender can have against the property value.

Nothing you have said suggests any issues or concerns. Also, with the complaint, the firm is required to review the whole sale and not just the points raised. A rejection would indicate they found no wrongdoing.

Collster

Thank you for your reply, dunstonh.


[Sorry for not using the quote function. I'm selecting text and clicking on the quote button and nothing is happening.]


"That is a strange assumption as the illustrations would show compound and the documentation would explain as such."


I'm surprised you should make that comment about someone who is elderly. Someone in their eighties will often think in terms of simple interest rates.


"It is not a requirement for a borrower to seek independent advice. Going direct to provider is allowed."


OK, thanks for confirming that.


"It's not far off the norm. Remember that the rate tends not to go up as much either during periods of higher interest rates and there is a cap on how much the lender can have against the property value."


Do you mean not far off the norm now or not far off the norm 15 years ago? The norm now seems to be between 5 and 6% which is a long way off 8.25%.

"Nothing you have said suggests any issues or concerns. Also, with the complaint, the firm is required to review the whole sale and not just the points raised. A rejection would indicate they found no wrongdoing. "


Fair enough if there are no issues. However, I work in a different branch of services and I know how badly reviews are carried out and that firms will often automatically reject a claim regardless.

dunstonh

I'm surprised you should make that comment about someone who is elderly. Someone in their eighties will often think in terms of simple interest rates.

What lending product would they have had in their lifetime that was simple? Mortgages? no. Loans? no. Credit cards? no. So, why do you think that simple interest would have been normal for him?

Do you mean not far off the norm now or not far off the norm 15 years ago? The norm now seems to be between 5 and 6% which is a long way off 8.25%.

its the norm for equity release. Remember that you cannot compare them with retail residential mortgages. Remember that you are asking investors to put aside money for what could be 30-40 years. The terms have to attract investors as much as attracting borrowers. You also dont get the same economies of scale with equity release compared to residential mortgages. Note how it is mostly insurers that offer equity release. Not the banks.

However, I work in a different branch of services and I know how badly reviews are carried out and that firms will often automatically reject a claim regardless.

Possible that can happen. That is what the FOS is for if the complainant cannot agree with the response.

Thrugelmir

Collster wrote: »

I do also think that the 8.25% rate is excessive. It seems very high and strikes me as taking advantage of people as they approach a vulnerable age.

What was the BOE base rate 15 years ago?

Collster

What lending product would they have had in their lifetime that was simple? Mortgages? no. Loans? no. Credit cards? no. So, why do you think that simple interest would have been normal for him?

I assume it's because he worked in pensions, where simple interested used to be calculated. Remember, he is not a young man. I agree with you with you about lending products and I can't imagine why he thought it would have been simple - I just know that he did and when he told me, I asked him to show me the paperwork for the equity release. But in some ways, your stance backs up the point I made about the elderly being vulnerable. It's annoying that they start to slow up and get confused but hey, ho that's what often happens.

its the norm for equity release. Remember that you cannot compare them with retail residential mortgages. Remember that you are asking investors to put aside money for what could be 30-40 years. The terms have to attract investors as much as attracting borrowers. You also dont get the same economies of scale with equity release compared to residential mortgages. Note how it is mostly insurers that offer equity release. Not the banks.

The norm for equity release appears to be as a I stated previously. They very best are just above 5% but 6% looks standard. There's a huge difference between 6% and 8.25%. I can't understand why you are saying that 8.25% is the norm. You didn't answer my question but I get the impression that the rates on these products have fallen in the last 15 years. Can you point me in the right direction to investigate further?

Collster

What was the BOE base rate 15 years ago?

OK. Thanks.


Around 5%. So the point being that 8.25% would have been a reasonable rate for the product at the time?


Does mean that the provider has 'lucked out' or are things not quite so straightforward? They wouldn't have actually had to borrow the money to lend it, would they?


Why is the rate on the product fixed rather than variable?

Thrugelmir

Collster wrote: »

OK. Thanks.


Around 5%. So the point being that 8.25% would have been a reasonable rate for the product at the time?


Does mean that the provider has 'lucked out' or are things not quite so straightforward? They wouldn't have actually had to borrow the money to lend it, would they?


Why is the rate on the product fixed rather than variable?

Started the year at 5.75% and rose to 6% in February remaining at that level for the remainder of the year.

Lenders don't rely on luck. They'd go bust if they did. Long term finance arrangements will be put in place to finance the products offered. That effectively guarantee the lender a certain profit margin. Irresp

Products come in many forms. Your father choose a fixed one. What if interest rates had risen?

TrickyDicky101

Collster wrote: »

OK. Thanks.


Around 5%. So the point being that 8.25% would have been a reasonable rate for the product at the time?


Does mean that the provider has 'lucked out' or are things not quite so straightforward? They wouldn't have actually had to borrow the money to lend it, would they?


Why is the rate on the product fixed rather than variable?

Where else would they get the money from? Equity tends to be much more expensive than debt financing.

dunstonh

But in some ways, your stance backs up the point I made about the elderly being vulnerable. It's annoying that they start to slow up and get confused but hey, ho that's what often happens.

That is one of the reasons why legal advice is now required. It gives an extra layer of protection. Plus, advisers now need a specialist qualification and regulatory permissions to offer it.

Rates were around 7.5% a year or two back.

They wouldn't have actually had to borrow the money to lend it, would they?

Yes. That is how lending money works. Banks borrow to lend to others. They use savers money and pay savers and interest rate. They lend that money and make profit on the net interest margin. Insurers are not deposit takers. They need investors. The rate needs to be attractive enough to get investors money whilst being competitive to offer the product.

Collster

That is one of the reasons why legal advice is now required. It gives an extra layer of protection. Plus, advisers now need a specialist qualification and regulatory permissions to offer it.

Actually, even 15 years ago for the product my folks took, they were required to take legal advice. I'd just have felt happier about it if they had also been required to take independent financial advice.

Yes. That is how lending money works. Banks borrow to lend to others. They use savers money and pay savers and interest rate. They lend that money and make profit on the net interest margin. Insurers are not deposit takers. They need investors. The rate needs to be attractive enough to get investors money whilst being competitive to offer the product.

It was an insurance company that sold them the product. If I understand your answer correctly, insurance companies are allowed to use money from their investors to finance the equity release. That was my original assumption behind my badly put question. What's safer than lending 15% of the value of a house? House values would really have to crash for the equity release product to fail from the insurance company's perspective. As investments go it would be hard to find something safer, which is what was bothering me about the high interest rate.


Thanks, everyone, for your replies and for helping me to understand some of the issues involved.


In particular, Thrugelmir, getting me to think about the BoE base rate was really useful. I've already been able to go back to my mum and help her to see that in 2000 it wouldn't have seemed such a poor decision as it does now. Hindsight, eh?


I know that she was never happy about the equity release but the house was originally my stepfather's so she didn't feel morally that she could say no because it's what he wanted to do.


Anyway, if I can manage to stop her berating him, some good will have come of this!