United Kingdom

Hope at last for thousands tangled in unfair equity release trap

Thousands of homeowners chained to toxic equity release mortgages could finally be set free, saving each of them thousands of pounds.

Soaring numbers of older homeowners use the loans as a way to borrow money against the value of their properties.

In contrast to conventional mortgages, the debt and interest is not repaid until the owner dies or moves into a care home.

Hope: Age Partnership has pledged to look at all existing equity release loans to see whether borrowers can be switched to a better deal

But homeowners who took out an equity release loan two or more years ago are likely to be on a bloated, expensive deal, which is rapidly devouring the value of their home.

Today, the UK's largest equity release broker, Age Partnership, has pledged to look at all existing equity release loans to see whether borrowers can be switched to a better deal.

Steve Auckland, chief executive of Age Partnership, says the broker wants to 'clean up' the industry. 'We're doing this now because equity release has in the past had a tarnished reputation,' he says. 'People felt they were being ripped off, some of the earlier products were really inflexible and the loans had high interest rates.'

Age Partnership is inviting anyone with an existing equity release loan to contact them to see if they can move to a cheaper rate, whether or not it arranged the original loan.

Steve Baker is the Conservative MP for Wycombe and sits on the influential Treasury Select Committee. He says it is time the equity release industry tackled these toxic loans.

'This is a welcome step that could bring peace of mind to many elderly individuals who have found themselves, through no fault of their own, as equity release mortgage prisoners in this ultra-low interest rate environment,' he says.

We'll save a lot. It's a weight off my mind

About 14 per cent of all equity release loans are classed as toxic, which means they have an interest rate of 6 per cent or more. But rates have plunged in recent years, with loans available today at just 2.8 per cent.

Switching to a new deal can lead to massive savings. A loan taken out with a 6 per cent interest rate doubles in size in 12 years; one with a 2.8 per cent rate takes 25 years to double.

Older loans used to be hard to escape from, as they came with crippling early repayment charges.

However, rates have fallen so dramatically that homeowners on old deals may be able to save money by switching to a new one even if it means stumping up for early repayment charges.

'Toxic': About 14% of all equity release loans are classed as toxic, which means they have an interest rate of 6% or more

Joan and John White, both 68, took out a £30,000 equity release mortgage four years ago. But with an interest rate of 6.45 per cent, the couple from Whitby, North Yorkshire, worried their debt was growing so fast there would be nothing to leave to their children and grandchildren.

'We had tried to switch in the past, but the early repayment charges would have wiped out any saving,' says Joan. But by March, rates had plunged so far that it became worth paying the exit charges and switching to a lower rate.

The Whites switched to a 3.04 per cent deal, resulting in a potential saving of more than £68,000. Joan says: 'We'll save a huge amount of money that would otherwise have been swallowed up in interest. It's been a weight off my mind.'

Homeowners who took out loans when they were less than 60 years old stand to benefit the most, as the rates they were offered were among the worst. But even homeowners who took out a loan just three years ago could benefit, as rates have almost halved since then.

Richard and Carol Roberts, from Shropshire, switched equity release plans in February, moving their £60,000 mortgage from an interest rate of 4.74 per cent to one charging 2.86 per cent. They should save more than £51,000 over the lifetime of the mortgage.

'I never imagined that such a small rate change would save us such a large amount of money,' says Richard, 65. 'The whole process went very smoothly and took less than three weeks to arrange.'

The couple are planning to buy a new kitchen, bathroom and have a new conservatory roof installed.

Age Partnership's move this week is the first time a big equity release broker has promised to look at all equity release mortgages to see if holders can be moved on to a better product. Other specialist brokers may also be able to offer advice.

Andrew Morris, senior equity release adviser at the broker, says that finding out whether someone can move on to a new loan is straightforward. We're willing to look at everyone who has had an equity release mortgage for at least 12 months,' he says.

'If they haven't taken the original loan out with us, we'll need a signed letter of authority so we can get all the details from the plan provider. But we can sort out all that for the homeowner and call them back with a yes or no answer.'

Steve Baker, the Conservative MP for Wycombe who sits on the influential Treasury Select Committee, says it is time the equity release industry tackled these toxic loans

Age Partnership is a broker rather than a lender, so it searches the whole of the equity release market for the best products, much like a mortgage broker does for conventional mortgages. It gets a fee when 'rebroking' loans, but there is no charge if it is unable to find a better deal or a homeowner decides not to go ahead with the switch.

Auckland adds: 'Our fees are included in the calculation so we'll only do it if it makes financial sense for the customer.'

The equity release market has grown rapidly. In the year 2000, 13,200 new customers took out loans worth £524.2million. By 2020, that had risen to 40,337 new customers, taking out loans worth £3.9billion.

In the early days, some equity release lenders attracted negative publicity for hounding bereaved relatives of customers for loan repayments if the value of a property had fallen below the value of the debt. Grieving family members were asked to pay off thousands of pounds of debt they had not incurred themselves.

But changes to the industry mean that all schemes approved by the Equity Release Council are 'no negative equity' – meaning it is the lender, rather than the borrower or their estate, that takes the hit if the loan grows larger than the value of the house that it is lent against.

High profile critics of equity release include former tennis player Andrew Castle, who was shocked to find that a £70,000 equity release mortgage taken out by his parents-in-law had escalated to £116,000 in just six years.

Increased demand in recent years has led to a rise in the number of lenders, and this competition has helped drive down prices and improve innovation. In 2015 just 43 products were available whereas today there are more than 400. 

Loans are also more flexible. Some allow homeowners to pay the interest each month so the value of their loan does not snowball. 

Equity release is often used in retirement planning to help fund home improvements, to bridge a gap until the State Pension kicks in or to help younger family members get on the property ladder.

Kevin Dowd, professor of finance and economics at Durham University, has been investigating equity release mortgages for several years. He said of today's announcement: 'At first glance it sounds like a welcome step in the right direction, especially considering the poor reputation the equity release industry has had in the past.'

But he cautions that one problem with older equity release schemes is that many people may not be aware of how large their debt has grown. He says: 'Hopefully this will at least encourage people to find out what their current situation is, so they are aware of any problems they or their families might be facing.'

To speak to Age Partnership about reviewing your equity release mortgage, call freephone 0800 316 7843.

The Mail on Sunday has produced the complete guide to equity release, written by our Personal Finance Editor Jeff Prestridge. To request your free copy, visit mailfinance.co.uk/release or call freephone 0808 223 3667.

If you or a family member feel stuck on a 'toxic' equity release mortgage email [email protected] 

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