Pensioners stranded in equity release hell

Trapped by early repayment charges - while debt doubles

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Equity release figures continue to soar, and record sums were released from properties in this way in the three months between April and June this year. However, while the over 55s continue to pile into the products, others with deals a decade or more old are discovering the price they have paid for this cash.

Equity release is considered a boon for pensioners, who are sitting on a huge amount of value in the family home, and yet don't have the cash for things like home improvements, debt repayments and even day-to-day living costs.

Most equity release products are designed to give you a lump sum, borrowed against the value of your property. Some 99% of deals are lifetime mortgages - where you borrow a lump sum (or regular smaller sums), and when your home is eventually sold, the lump sum has to be repaid. The sting in the tail with these deals is that you are charged interest for the duration of the loan - which can be at 8% or more.

Costs

It means that someone who took out a loan ten years ago could find their debt has doubled. This interest can mount alarmingly. Former tennis star Andrew Castle, for example, recently spoke out against a scheme taken out by one of his elderly relatives. He said they had borrowed £70,000 against their home, and after six years - when they sold up to move into a care home - they lost £98,000 of the value of their home. In this instance they had paid 6% a year, plus early redemption fees.

The early repayment charges on some of these products mean that older people who want to sell up are trapped by the schemes, which charge tens of thousands of pounds if they want to sell up to downsize, or if one of the couple wants to move into long term care. The deals usually mean there's no early repayment fee if both of the couple move into care, or after they die, but if they sell at any stage before this, there may be a charge.

Complaints

The impossible position these products have left people in has meant a surge in complaints to the Financial Ombudsman Service.

In the majority of cases, the charges and fees will be laid out in the small print of the deals - along with the fees to set up a deal which can run into thousands of pounds too - so provided they have not been mis-sold the product, customers have no recourse to the Financial Ombudsman. Instead they have to make a choice between selling up and paying the charges, or accruing even more interest.

All these drawbacks have led Which? to brand equity release as "an expensive way to borrow money, even as a last resort."

This underlines how important it is for people to consider all their options before getting into an equity release deal. It's also worth looking at whether downsizing will free up the lump sum you need, whether you can make money from renting out a room in your home for income, or whether family members can help out in return for a proportion of the value of the property.

In some cases, people will still choose equity release. But before you do, it's essential you know what you're getting into and just how much it could end up costing.

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