Equity release/home reversion

Absolutely agree.

However if you have started your ninth decade and need adaptations to your home done for your medical needs then it is a wonderful arrangement. If your children encourage you to go for it, it can remove a huge amount of stress and provide a cushion.

MOnica I to came across a few people who had transferred property thinking they would beat the system for tax, care costs. No such thing for the ordinary person.

There is no teason why families should not discuss finance and loans these days, many have a loan to buy a car or a house and credit cards are universal.

I did quite early, dad had a loan to buy land, so I understood how it was going to be paid back, so I followed on in my business. I also learned to read the small print, as Graphite illustrates, there are blatant crooks in the finace industry who will fleece you then brag about it to their mates
The GFC was caused by deliberate fraud and the smart polititians and economists watched it happen.

The answer is you get owt for nought and if it looks too good to be true, it generally is. But people are greedy, both borrower and lender, and this gets more people into trouble than anything else.

I think the issue with historical cases of massive equity release debt is rooted in issues not necessarily connected to lack of arithmetical skills. In the cases I have seen and read about on the Financial Ombudsman’s decision database, the equity release company did provide the numbers showing how the debt would grow over time, although I haven’t seen any numbers that went beyond 20 years.

However what they sometimes did was to overestimate the value of the property at the start. It’s easy to pull off as it exploits the tendency that some people have of wanting to think their property is worth more than it is. That initial overvaluation was then used not only as the basis for the loan offered but also as the basis for the projections of what the property would be worth in 10 and 20 years time compared to the size of the debt. Projections were based on 3% and 6% annual growth.

Nowadays we have easy online access to Land Registry sales data directly from registry and from RightMove and Zoopla. That wasn’t the case in the earlier years of equity release. Someone may not have known what similar houses in the area had been sold for and just accepted the valuer’s word, happy that their property was worth what he said it was.

What they didn’t know was that ER firms had contracts with national valuers to commit what is effectively mortgage fraud. Whatever valuation the sales rep needed in order to push the size of loan he wanted (so he could earn more commission) was given to the valuer who just returned the value requested.

As the linked article shows, it’s been common practice for all kinds of of mortgages. Some loan applicants are willing and complicit because they want to borrow more than an accurate valuation would allow.

But when the overvaluation is used in equity, it deliberately misleads the borrower into believing they will have more equity left than proves to be the case. I’ve see overvaluations of 30% to 40% on lower value properties.

Valuing a £50,000 house at £65,000 may not seem a lot but 20 years down the line, if values have risen by an average of 6% a year, that makes a difference of over £40,000 between the projected value and the real value - the difference between having enough equity left to be able to pay for a year of old age care or not.

Combatting valuation fraud:

www.mortgagefinancegazette.com/market-news/fraud/combating-valuation-fraud-13-08-2009/

I wanted to know what the thinking was behind it all personally - as all I did understand was I was being charged rather noticeably more than my friends for "board and lodge" once I left school. So all I knew was that my mother had probably based her ideas about that on the fact that her "mother" (ie her grandmother - so someone two generations older than her) had charged my mother £2 per week board and lodge when she started work (that would have been in the 1940s) and that was the same amount as the lodger paid! She was also told to hand over money towards the coalman (and the lodger wasnt) and was expected to do all her grandmothers housework (and the lodger wasnt). So I knew her way of thinking was probably illogical and unfair.

Unless the logic of it was to get me to move out as soon as possible in order to avoid my own mother making money out of me etc. Cue for heading off to Denmark to live only about 18 months after leaving school and then deciding to head into Bedsitland when I re-emerged back in England a few months later - as I decided that, if anyone was going to make a profit out of me, I'd rather it was a landlord than my mother (as he/she would be entitled to a profit - as it was their living and at least I'd have my freedom to live as I chose without problem). Yep....I'd also noticed that my brother wasnt expected to do as much housework as me....no explanation given for that either. It didnt take me long to notice I didnt seem to be any worse off at all when I moved into Bedsitland - and so I must have been correct in how I was thinking.

I was too modern and fair-minded to continue living with my mother basically and knew my father would rarely stick up for me against her. He'd put his foot down that I was to continue in education however long I myself decided to (ie even if it meant university eventually) - she would have whipped me out of school at 16 left to her - but that was it basically.

M0nica

My parents never said anything about money, but they lived within their income.

But basic money management was in the atmosphere of life. keeping out of debt, saving for a rainy date, budgetting for regular outgoings. Nobody need say anything that is what people did aand if your ead newspapers and magzines, womens page, whenever money came up, these principles underlaay it.

I agree, my parents didn't discuss it with us, I didn't discuss it with mine beyond saying no I can't afford it or no I'm not spending my hard earned money on over expensive rubbish. I managed to work it out.

Mr Micawbers advice wasn't bad although lots of young people wouldn't understand 19/6d.

I have to say if one of my teenagers had suggested a meeting to discuss family finances based on their belief they understood it better than I did I'd have wondered if they were sniffing glue or if it was something worse.

My parents never said anything about money, but they lived within their income.

But basic money management was in the atmosphere of life. keeping out of debt, saving for a rainy date, budgetting for regular outgoings. Nobody need say anything that is what people did aand if your ead newspapers and magzines, womens page, whenever money came up, these principles underlaay it.

Remembered exactly why now that I learnt a big fat Nothing about finances from my family - as there was an occasion where teenage me proposed we have a family meeting to discuss the family finances (errrm....I'd already got the idea that maybe I was better with money than my mother....) and she pointblank refused. Fast forward many years and my father told me a bit about how my brother had got the lions share of the "children" money thanks to her - and so I guess the reason for pointblank refusal by her to discuss any money with me was because I'd have realised many years sooner than I did that that was going on.....(eg my - high - board and lodge money when I started work just went. But his board and lodge money when he did got saved by her and handed back to him when he got married!).

So some peoples families are the last place many people are going to learn about finances.

M0nica

I do not think any of us were taught about household finances when we were at school, but we sorted everything out. I think we learn more about prudent money management from our parents and family than we do at school

Gawd help some people then M0nica - as many people don't learn much about money management from our family.

I know I didn't basically. Just one lesson - ie don't get into debt - and that about sums it up. My mother was the one that managed money in their household and she wasnt great at it. Am now recalling when someone came along for due visit for money she owed and she commented she'd told me to sit quietly on the stairs - so we could pretend to be out - as she didnt have that money she knew was due. I can't actually think just where I did learn money management in the event - so maybe it was at school??

Thankfully I'm a "reader" and so I know I read all the stuff about bulk-buying/own brand buying/shopping around/using up leftovers/etc from newspapers and magazines. Basically I think I must have learnt absolutely everything I do know financially in fact from those sources - and have certainly picked up some very useful financial info. on managing my money over the years from said newspapers/magazines. Thankfully including higher level stuff - like basic pension advice, basic benefits advice (thankfully - or the DHSS as was would have underpaid me benefit when I was unemployed thanks to a "daffy delilah" who didnt know her job properly), all sorts of useful money management advice. So - thank goodness for that magazine/newspaper money advice.

My mother was so not-that-good with money that the one and only time I asked to borrow some money to invest in a cast-iron certainty investment (ie opening loads of building society accounts and then sitting back and waiting for payouts to their customers a couple of years later) she couldnt (or wouldnt) see it and trust me about the one "ask" I ever made in that respect. Cue for me thinking "I'm going to do this anyway" and having to get an overdraft on my bank account and mentally knock the fees off those payments - as "costs incurred" to get them. I still managed to make a noticeable profit - oh well....at least that profit was all mine...as I'd proposed to her that, if she lent me the money, I'd share the profit 50/50 with her. So I probably made more in the event - despite those bank charges.

I do not think any of us were taught about household finances when we were at school, but we sorted everything out. I think we learn more about prudent money management from our parents and family than we do at school

Crikey Graphite - thanks for explaining that clearly to us all.

M0nica

There was a report in the papers last week on just how poor the mathematical skills of many people are.

I cannot find a reference to this years report, but this link, which is a couple of years old says essentially what this year's report said www.nationalnumeracy.org.uk/news/new-survey-uk-numeracy

Many graduates dont have a basic grasp of household finances and certainly polititians dont have a clue about economics. Try running a business without being very skilled handling finances.

Its a basic flaw in our education system

There was a report in the papers last week on just how poor the mathematical skills of many people are.

I cannot find a reference to this years report, but this link, which is a couple of years old says essentially what this year's report said www.nationalnumeracy.org.uk/news/new-survey-uk-numeracy

I am sorry to hear that surfingsal but I can understand how it happened and have seen it many times.

The Financial Ombudsman’s case decision database records over 2000 complaints about lifetime mortgages, almost 800 upheld.

It’s usual for equity release companies to charge 3 points above base rate; compound interest fixed for the lifetime of the mortgage.

As M0nica says, compound interest is often misunderstood.

In 1991, interest rates were very high. At the start of that year the base rate was 13.38% and at the end 10.38%. Therefore, your mother may have been charged anything from 16.38% to 13.38%. Even assuming the lower of the two, a loan of only £10,000 would accumulate into debt of over £700,000 in 34 years. That sounds extraordinary but plugging the numbers into a simple spreadsheet shows how this happens.

Typically, someone in their early 60s would have been offered a loan of between 15% and 25% of the market value of their house.

Your mother should have received an annual statement showing the accumulating debt and the early repayment penalty so she would have been aware of the numbers but I know that people can go into denial over it, frightened to tell their families. Often the truth doesn’t emerge until after their death or the need for residential care arises.

Whatever they spent the money on decades ago - a car, some home improvements or just to put in the bank to supplement a low income and pay the bills - is long forgotten but the debt keeps mounting at a rate of £50,000, then £60,000, then £70,000, then £80,000, then £90,000 a year in the latter years.

It’s nothing less than loansharking. And while interest rates are lower now, the current rate of near 7% is still considered toxic. I would advise anyone under the age of 80 to avoid these schemes.

I would also urge you to look very closely at the originally paperwork for your mother's loan. Cases of misselling were rife. Sales reps masquerading as financial advisors worked on high rates of commission under pressure to push loans which were more than the applicant wanted or needed. Why not borrow an extra £5,000 to have some luxury holidays? was a common ploy. A £5,000 loan turns into a debt of almost £360,000 over 34 years.

surfingsal

my widowed mother took equity out on her house over 34 years ago , she is now 96 and ten weeks ago had to go into a home as I could not mange caring for her any longer , both my husband and I have LPA's it was mums idea, so we found out 10 years ago about the Equity release, her house is now on the market for £775.000 and all but £20.000 will be taken by the Equity release , she has no idea that everything has gone she really thinks I am about to inherit a fortune, I cant tell her she would be devastated especially as at the moment we are funding her care home fees ourselves.

Sadly, that is the reality of equity release, and this would have been explained to your mother when she signed up to it. Unfortunately many people really do not understand the way compound interest works and just the extent to which this leads to an escalating annual interest chargewhich soon swallows up the remaining equity in the house despite rising house prices.

my widowed mother took equity out on her house over 34 years ago , she is now 96 and ten weeks ago had to go into a home as I could not mange caring for her any longer , both my husband and I have LPA's it was mums idea, so we found out 10 years ago about the Equity release, her house is now on the market for £775.000 and all but £20.000 will be taken by the Equity release , she has no idea that everything has gone she really thinks I am about to inherit a fortune, I cant tell her she would be devastated especially as at the moment we are funding her care home fees ourselves.

The information that Graphite has given should be enough to put most people off

Be very sure that you don't want to ever sell the house and downsize.

Graphite The question must be whether the house is worth the rounded up debt. if the debt owed is £9

If someone took out a equity release scheme in 2005, and died this years, it would be evenstevens and equity release schemes like to see the value of the house exceed the total owed, to be on the safe side. We cannot assume that house prices will continue to rise as fast as they have in the past. If a house has racked up interst payments of £920,000 and its market value is £750,000, then the company is out of pocket.

Cariad I think you were unluckywith your male lodger. DD had 2 male and 2 female lodgers, separately, and the men were fine. One remains a good friend, over 30 years later. one female died and she had a big fallout with the other someone she had been friens with since she was free.

Mind you both mothers, we were friends, knowing our respective daughters could see how it would end and tried to discourage them from sharing a flat, but they were convinced they knew better, sigh.

Crikey - I didn't know those other disadvantages to those schemes (ie as well as the sex discrimination ones).

That would sound an absolute death knell to me - even when they finally have no choice but to remove that discrimination. Not even able to do (or not do) whatever one pleased to one's own home because of their "terms and conditions" = eeek!!!!

Cheaper/easier to see if there's one of those schemes around whereby an older home-owner deliberately takes in a younger lodger at a reduced rate and it's done on an expected "friendly" and "helpful" to the home-owner basis - assuming one can bear sharing one's home. I'd add a little note into that - that I had to take in lodgers when I bought my starter home finally all those years back - and hindsight tells me I'd never have taken in any male lodgers (as they were always bad ones without fail - basically because they never ever did any of their own housework - even though I always specified to all lodgers that I never did their housework and they would be expected to do their own and I stuck to it - I would only ever do my own housework and the communal areas general housework).

M0nica. I disagree that OP would be a bad risk using that data as an example. Equity release lenders know that the the longer someone lives, the more money they make especially in the later years. Younger applicants are seen as a very lucrative long term investment.

Lenders would be unlikely to offer 50% of market value to someone age 68. 25% to 27% is the norm for someone late 60s early 70s.

A compound interest rate over 6% is considered toxic. The current rate, as you say, is nearer 7%.

Let’s say the property is worth £250,000 and they are loaned £67,000. After 10 years the debt is £132,000. After 20 years, £232,000. After 30 years, £462,000. It’s still loansharking but the increasing value of the house even at just 3% a year is likely to exceed the size of the debt.

The people who have to be most careful with these schemes are those who property has a low value. Some firms will lend on property with a market value as little as £75,000. 25 years ago it was £50,000. These companies prey on people who are both cash and asset poor.

My feelings about these vultures aside, unless there is a pressing need for that amount of funds for some capital venture why do it? I have known people borrow on equity release at a compound interest rate only to put the money in the bank at a much lower rate of simple interest Why?

A draw down loan might be worth considering instead.

It should be borne in mind, that some of the clauses written into loan agreements are frightening as regards the lender’s rights over the property e.g the right to repossess if it doesn’t consider sufficient maintenance is being carried out.

Every five years they will write and ask for a list of what maintenance has been done in the preceding five years with documentary evidence. If nothing has been done they will want to know why.

They have the right to repossess if even a minor change to the property was made without its permission.

They can veto any proposed move to another property by refusing to roll the debt into the new property. Instead they could demand repayment of the debt with an early repayment penalty that could be as much as 90% of the original loan.

The debt is capped at the value of the property at the death of the mortgagee or when they go into residental care. Therefore they are reluctant to agree to downsizing if it means rolling the debt into a lower value property.

They can even veto a move into residential care if they consider care needs are not suffient to warrant it. It is in the lender’s interest to have the loan continue until the borrower’s death as it in the last years that they make the most money on the loan. In M0nica’s example of a £125,000 loan, interest added in the first years is £8,750. By year 10 it’s over £16,000 a year, year 20 over £28,000 a year, year 30 over £56,000 a year.

If a 68 year old applicant were to borrow £125,000 and lives to 98, the accumulated debt would be over £920,000. That’s a substantial return on the loan even if the lender has to wait 30 years for it.

Don't forget that's one bit of sex discrimination that still exists - ie a woman is paid less than a same age man in same house would be.

I certainly won't ever check out those schemes whilst that discrimination is going on that's for sure. I refuse to be discriminated against.

They've got an excuse for it and, as I recall, the excuse reads "Oh well - the average woman lives longer than the average man". Those actuarial tables on how long people are going to live that the insurance companies etc have are still to this day doing one set for men and another set for women - rather than putting both sexes together and putting "average age PEOPLE reach" (sex irrelevant).

I'd be sick as a parrot to know an equivalent man to me would be being paid more than me - for no reason whatsoever that was to do with me - but just because my body is female. I'm longing for the day when some of these people that self-identify as the opposite sex to what they are find this is affecting one of them - ie a man who self-identifies as a woman - and then this might be put right.