Equity Release - BEWARE

empiremonkey

I've recently obtained Power of Attorney for my 80 year old dad because he has onset dementia. While going through his "paperwork" with him, I discovered that he and my late mother in 2004 arranged with then Norwich Union (now Aviva) £22k on equity release at 7% interest. 18 years later, that debt is now near £90k and increasing at about £7k a year. The house is valued at an estimated at £160k in value.

My dad was totally unaware of this and thought the statement he was receiving each year was some kind of investment fund. He is now devastated knowing that in a "few years time", Aviva will effectively own the pretty much the whole house. He tells me the Norwich Union representative at the time said "the way house process are rising, he would never owe more that about 20% of the value of the house", but sadly there is no paperwork saying this. 

There is also an early payment fee of £7k, so trying to move it to a lower interest rate arrangement, would probably not be worth it.

So, if you are relatively healthy and plan to stick around for a number of years, think hard about equity release, as the debt really starts to rack up the longer you live.

[Deleted User]

empiremonkey said:

There is also an early payment fee of £7k, so trying to move it to a lower interest rate arrangement, would probably not be worth it.

It would definitely be worth it if it's an option, if you expect the debt to reach 100% of the property value, which will take another decade or so, even without any increase in the value of the property.

However, it'll likely be a challenge to raise that level of borrowing.

TheAble

It's horrendous but that is compound interest for you. I wonder how many people taking these products really understand the future implications.

MWT

empiremonkey said:

So, if you are relatively healthy and plan to stick around for a number of years, think hard about equity release, as the debt really starts to rack up the longer you live.

Posts from people in your situation appear quite often on here, and to be honest, the best advice I would give to those with children, is to tell them what you are doing at the time, as it can come as a great shock that the resources available to their parents in their declining years, or the inheritance they might have been anticipating at some point in the future, is far less than they were expecting.

If talked about at the time there may have been other alternatives to taking equity release in the first place...

18 years ago your parents would have been fully aware of what they were doing and obviously felt they needed the money at the time and subsequently put it to some use which your father may or may not be able to tell you if he wishes.

It is not uncommon for those around your fathers age in 2004 to be using the funds to meet a shortfall in an interest-only mortgage that became due for example, and many did not want to tell their children that their plans for that had not worked out so would not have been comfortable talking about it at the time sadly.

Hopefully you can find a path to reducing the impact of the rolled-up interest, and if there is still an early repayment charge (ERC), do check if there is a permitted limit for a partial payment each year which would not trigger the ERC.

The other point which I expect you will have realised is that should your fathers health require that he goes into long term-care or moves out of the property to live with another family member that will trigger the end of the mortgage and require repayment of the loan, in that circumstance there is no ERC to pay, but do read all the T&Cs so you understand the specific product that he has taken.

 

Keep_pedalling

How do you know your parents were unaware of what they were signing up to 18 years ago when presumably they still had their full mental faculties? Your father has lost nothing doing this and hopefully the £20k they obtained though ER was used to make their life somewhat more comfortable than it would have done if they had not done it.

Frankly I think you made a major mistake in raising this with him in his current mental state and you would be wise to reassure him that it does not matter, and that you are not bothered about an inheritance (even if this is not true). The import thing now is his well-being which needs to be put above everything else.

For those who are asset rich and cash poor ER can be a good thing even if it does considerable reduce the amount your children inherit.

MWT

TheAble said:

It's horrendous but that is compound interest for you. I wonder how many people taking these products really understand the future implications.

These days it is impossible to take an equity release product without having the future implications clearly and explicitly laid out in front of you, and it has not been so very different for a long time now as these products have been regulated for many years.

They are not the right choice for everyone, but the current generation of property owners arriving in their 60's have often seen some very significant growth in their property values and equity release offers a way to access that growth without having to down-size at a time when increasingly, younger members of the family are either not moving out, or are perhaps moving back home again, so down-sizing isn't even really an option.

TheAble

MWT said:

TheAble said:

It's horrendous but that is compound interest for you. I wonder how many people taking these products really understand the future implications.

These days it is impossible to take an equity release product without having the future implications clearly and explicitly laid out in front of you, and it has not been so very different for a long time now as these products have been regulated for many years.

I don't doubt what you're saying, though for all that they have it clearly laid out for them, can they really appreciate it is the part I question. It can be hard for some to imagine that £22k really will grow to £90k if left to accumulate for 18 years at 7%. Plus as well they're in a bit of a weak spot in that they maybe really need the money, likely in many cases owing to interest-only/endowment mortgage shortfalls as you have said. It just feels a bit to me like a bad product being stacked up onto previous bad products - but then if you're in that position I guess (grudgingly) it has its place...

Linton

TheAble said:

MWT said:

TheAble said:

It's horrendous but that is compound interest for you. I wonder how many people taking these products really understand the future implications.

These days it is impossible to take an equity release product without having the future implications clearly and explicitly laid out in front of you, and it has not been so very different for a long time now as these products have been regulated for many years.

I don't doubt what you're saying, though for all that they have it clearly laid out for them, can they really appreciate it is the part I question. It can be hard for some to imagine that £22k really will grow to £90k if left to accumulate for 18 years at 7%. Plus as well they're in a bit of a weak spot in that they maybe really need the money, likely in many cases owing to interest-only/endowment mortgage shortfalls as you have said. It just feels a bit to me like a bad product being stacked up onto previous bad products - but then if you're in that position I guess (grudgingly) it has its place...

Nothing wrong with ER mortgages as a product.   You dont need to be desperate to go for one. Like all borrowing they can be a useful tool if you aren't desparate. Say you are 70 with sufficient pension to meet your day to day needs, own a £350K house with  no one who you feel needs/deserves that sort of money as an inheritance in 20 years time.  Then  raising £100k-150K cash from ER to spend on world cruises or whatever seems a perfectly reasonable idea to me.  Much better than dying with an unused £350K.

If you think 7% is expensive, consider that 18 tears ago when the OPs father took out an ER mortgage normal mortgage rates would have been around 5%-6% so 7% is hardly extortionate considering the mortgage company is taking the risk on when the loan would be repaid.  Last year you could have got an sizeable ER mortgage for 3%.

user1977

empiremonkey said:

he and my late mother in 2004 arranged with then Norwich Union (now Aviva) £22k on equity release at 7% interest. 18 years later, that debt is now near £90k and increasing at about £7k a year. The house is valued at an estimated at £160k in value.

the Norwich Union representative at the time said "the way house process are rising, he would never owe more that about 20% of the value of the house"

Does that make sense? Unless the house rose in price much more slowly than the UK average, surely just the £22k was more than 20% of the value of the house at the outset?

Exodi

TheAble said:

It just feels a bit to me like a bad product being stacked up onto previous bad products - but then if you're in that position I guess (grudgingly) it has its place...

All financial products will have different levels of value depending on the circumstances they are used.

ER, in my opinion, is best suited for those that don't want/need to leave an inheritance.

If you looked at a cash poor-asset rich pensioner with no children or family, equity release would unlock equity in the property they would have otherwise been unable to access - there is no point being the richest man in the graveyard. In this scenario, it doesn't matter if the interest rate was 7% or 700% (as most lenders offer a guarantee against negative equity).

Most, if not all, of the threads I've seen about how bad equity release is, are authored by the potential beneficiaries.

I don't mean to be harsh, but the OP's dad would have known about it when he received £22k in his bank (about £37.5k in todays money).

MWT

Exodi said:

ER, in my opinion, is best suited for those that don't want/need to leave an inheritance.

The other typical scenario is people with children who want to give them access to their inheritance early, usually to help with a house deposit for example...