Money Mail today exposes how pushy equity release salesmen are getting rich by draining the property wealth built up over decades by elderly homeowners.
Our investigation reveals how vulnerable customers are bombarded with calls, emails and letters encouraging them to take out expensive loans that can quickly wipe out a lifetime of mortgage payments.
And those who sell the loans are raking in lavish bonuses that can soar as the borrower takes on more debt.
Vulnerable customers are bring bombarded with calls, emails and letters encouraging them to take out equity release loans that can quickly wipe out a lifetime of mortgage payments
Equity release, also known as a lifetime mortgage, allows homeowners over 55 to borrow money they have saved up in their property.
The money usually has to be paid back only when you die or go into care, but the loans are offered with compound interest rates that snowball every month and can quickly swallow the value of an entire home, leaving loved ones with nothing to inherit.
Borrowers can also be trapped by exit charges of up to 25 per cent of the loan amount if they want to pay it off early or move home.
And yet business is booming. Close to £4 billion was borrowed last year, and it is feared more homeowners will resort to the costly loans after coronavirus wreaked havoc on the nation’s retirement savings.
It comes as last week the Financial Conduct Authority (FCA) warned that advice to older and vulnerable homeowners was ‘still not up to scratch’.
One broker told Money Mail: ‘The market is broken. We have no transparency, we have disproportionate fees. Equity release still has elements of the Wild West about it.’
We had to pay £91k just to get out of our equity release deal
Mik and Jenny Proom ,were forced to sell their home to get out of the equity-release contract
The Prooms took equity release on their four- bedroom home in Dawlish, Devon, that had been in the family for 44 years.
Mike, 77, and Jenny, 75, right, borrowed £35,000 in 2010, and a further £17,750 three years later. The compound interest rate was 6.5 per cent.
But Aviva refused to lend more in 2017 after the insurer’s surveyor had valued their home at £230,000 — £50,000 less than a similar property next door had sold for.
The couple had to sell the home to pay £91,800 to get out of the equity-release contract. They were left with just £130,000. They are now renting a small two-bedroom terrace house for £800 a month.
Mike says: ‘It may well be legal but it’s certainly immoral. Unless it is stopped, equity release will become the financial scandal of the century.’
An Aviva spokesman says the firm used an independent surveyor, and the valuation was ‘accurate and appropriate’.
He adds: ‘We acted reasonably and responsibly and have provided all the appropriate information to Mr Proom.’
THE BROKERS WHO ARE CASHING IN
Equity release advisers and brokers get paid vast commission. Most are paid percentage fees — meaning the bigger the loan they sell, the more money they pocket.
This is despite fees for ordinary mortgage deals being fixed and the FCA having banned similar percentage-fee incentives for investments and pensions back in 2012.
Equity release advisers have to be authorised by the FCA and therefore must act in their customers’ best interests. The loans also can only be signed off after independent advice from a solicitor.
If an adviser sells an equity release loan, they could expect 2 per cent commission from the provider and a 2 per cent fee from the homeowner — meaning they could make £3,200 on the average loan of £80,000.
One recent job advert for an ‘equity release specialist’ with a London firm reads: ‘Due to the large influx of leads coming over to us daily, the earning potential is endless.’
Another, for sales advisers with Equity Release Supermarket, promised a pay packet of up to £180,000 a year — more than Boris Johnson earns as Prime Minister.
Justin Modray, of Candid Financial Advice, says: ‘History suggests commissions may encourage advisers to do what’s best for them, rather than their customers.’
PESTERED INTO RISKY LOANS
Money Mail went online to find out how much a 65-year-old could release from a Home Counties property, and our reporter was then bombarded with calls, messages and letters.
Within ten minutes of requesting an online quote with one broker, the reporter received a mobile phone call.
Over the next two weeks he received repeated missed calls linked to equity release firms.
After requesting a quote with one advice firm six months ago, the reporter has since received six letters in the post and close to 30 emails encouraging him to consider a loan.
Close to £4bn was borrowed under equity release last year, and it is feared more homeowners will resort to the loans after coronavirus wreaked havoc on the nation’s retirement savings
Former pensions minister Baroness (Ros) Altmann says: ‘It is irresponsible and it shouldn’t be allowed.’
Equity release firms now frequently advertise on daytime TV. SunLife last year launched a multi-million-pound campaign featuring Carol Vorderman.
Critics fear many borrowers do not truly understand the potential cost of equity release.
Calculations from finance data firm Moneyfacts also show an equity release loan today at the average compound interest rate of 4.5 per cent would take little over 15 years to eat up a £300,000 home.
Yet it would take a homeowner 30 years to pay off a £270,000 mortgage in monthly instalments with an average rate of 2.43 per cent if they put down a 10 per cent deposit.
BACKED INTO A CORNER
Lynda Blackwell, former mortgages manager at the FCA, says homeowners in need of cash in retirement are often given no option but to take on a costly equity release loan.
She wants to see FCA regulation of equity release and ordinary mortgages brought under one roof, so advisers have to recommend a traditional mortgage instead.
She also wants new mortgage affordability tests for those in retirement. And she wants to see the industry come up with more product ideas so older homeowners have better choices.
But she says: ‘Nobody wants to do anything to make it better because they all make a lot of money.
‘No one wants to think of it from the customers’ point of view. It is not a good market and they need to take a long, hard look at themselves and what they are doing.’
The only real alternative for equity release customers is a retirement interest-only mortgage, which requires borrowers to be able to pay off interest monthly.
Equity release lenders have also taken steps to address concerns. New customers can now avoid hefty early-repayment charges after a fixed period.
Borrowers also do not need to take a large lump sum and can opt to take an income every month. Plans are also available that let homeowners pay off the interest every month.
Jim Boyd, of trade body the Equity Release Council, says regulations mean that advisers must only recommend equity release after considering alternatives as well as the customer’s financial and personal circumstances.
He says commission fees can help ‘to reduce or even eliminate the cost of advice to consumers’, and says firms should abide by advertising standards and regulations for financial promotion.
The FCA says it expects firms to act in the best interests of the customer and only recommend suitable products.
A spokesman adds: ‘No commission payment should compromise these standards. Firms are banned from making cold calls and should avoid other sales methods that may lead a customer to feel pressured.’
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