Equity Release Early Redemption Charge

supersuzytoo

My mil is selling her house (husband died) to come and live with us (can’t drive and is isolated, can’t manage stairs very well so she’s building annexe in our garden) She has a lifetime mortgage. The initial loan was £25000 the interest so far is just over £50000. It’s high but not surprising, however, the early redemption charge is over £29000. My Mil wasn’t aware that this would be so high, it’s more than 100% of the original loan. Is this usual? The paperwork states there will be an ERC and it can be high, however, even I was shocked that it would be over 100% more than the original loan. Does anyone know if this is correct or should there be a limit on this. Thanks

ViolaLass

What specifically does the paperwork say about the ERC?

supersuzytoo

I’ve got the paperwork now with exact figures from a redemption statement. It was taken out nov 2002 for 25k loan and interest is 70,811. Current years interest is 5,199. Admin 110. Erc 25,560. It says erc will be made if the 4.25% treasury 2032 gilt yield falls more than 0.12% between completion date and repayment date. The gilt yield on completion was 4.53%. The gilt yield today is 1.63% this was as at nov 2017 so this may have changed slightly since then.

Reading the original paperwork it does state the erc will be 25560. I just don’t think they realised this at the time and it was brushed over. They (her husband, who really didn’t understand any of it) wanted to deal with it themselves and refused any help from us. I know what they’re like, they would’ve just said yes to anything they were told.

Although she is coming to us for for long term care, I don’t think her care needs are enough to warrant the erc being removed yet. It seems ludicrous that she’ll be paying erc when she is moving to ensure she doesn’t get to the stage where she desperately needs care. We are building an annexe with the future in mind for all eventualities eg disabled access, possibilities to remove the use of kitchen (for dementia) etc.

Edi81

We!!!8217;re your in laws advised on this?
I wouldn!!!8217;t think that the average person would understand what the gilt yield would mean but it is in the original document. Back in 2002 there was no indication that interest rates would go down to twhere they are now. Is the interest fixed or variable?

davidmcn

I think the (reputable) providers at the time insisted on borrowers taking independent legal advice, so she ought to have had all this pointed out to her even if she hadn't realised herself. Which also means not much chance of a successful complaint against the lender (if there would be any grounds for complaint anyway).

TrickyDicky101

supersuzytoo wrote: »

My mil is selling her house (husband died) to come and live with us (can’t drive and is isolated, can’t manage stairs very well so she’s building annexe in our garden) She has a lifetime mortgage. The initial loan was £25000 the interest so far is just over £50000. It’s high but not surprising, however, the early redemption charge is over £29000. My Mil wasn’t aware that this would be so high, it’s more than 100% of the original loan. Is this usual? The paperwork states there will be an ERC and it can be high, however, even I was shocked that it would be over 100% more than the original loan. Does anyone know if this is correct or should there be a limit on this. Thanks

Typically you can find clauses like this in commercial lending agreements - it protects the lender from early repayment (ie they expect to lend £X for 30 years at X% pa interest. Early repayment means that for however many years until original maturity they forgo the interest they would have earned on the lending. The ERC thus compensates for this deficit.

I have no idea whether this is typical in equity release arrangements. It is in the agreement in black & white though - I think it would be unlikely your relative will be able to avoid it.

supersuzytoo

The interest rate is fixed

supersuzytoo

On speaking to mil today, the ‘independent’ financial advice was from the Norwich Union, who sold them their product !!!129300;

Thrugelmir

In 2002 no one could predict what was to follow.

Hindsight 16 years later isn't a basis for a misselling complaint.