Parents possibly mis sold Equity Release Mortgage?

[lisag]

Hello,

 

I may be clutching at straws and a little naive, but I would really appreciate it if someone clever could give an opinion on this scenario..

 

I have just discovered that in 2003 my parents took out an equity release mortgage with Norwich Union. The paperwork is now headed Aviva 'Index-Linked Lifetime Mortgage'.

 

They took 25% of the property value at the time, and were paid a total sum of £37,500. On the latest yearly statement, dated June 2011 they owe £71,005.96. They basically need more money, but they can't have any more, because the debt has grown so big that they now owe approx 35% of the property value, which is more than Aviva will lend them as they are in their early 70's.

 

They are both in reasonably good health and hopefully will live for many years yet. I imagine that by the time the property needs to be sold, the debt with Aviva could well be higher than the property value. There is a rider in the paperwork to say that there is a no negative equity guarantee.

 

So, it seems that Aviva / Norwich Union have essentially bought my parents property for 25% of its value in 2003.

 

This seems to me to be pretty outrageous, but I am not familiar with this area of the money / property market, so maybe it is usual? Here is some wording from the paperwork that seems to explain what is happening, but I am afraid I don't really understand it:

 

'This is an Index-Linked Lifetime Mortgage. It has a variable interest rate linked to inflation, with guaranteed minimum and maximum rates. Inflation is measured by reference to the UK All Items Index of Retail Prices, the RPI. On each anniversary of the loan, we will charge interest at the minimum rate and then increase your loan plus interest in line with any increase to the RPI. Each year, if there is an increase in the Retail Price Index, the interest rate will reflect the increase, up to the maximum rate. If there is no increase in the RPI, the interest rate will be the minimum rate.

 

The minimum rate on this lifetime mortgage is 4.89% and the maximum rate is 10.14%.

 

You do not have to make any monthly repayments during the life of this lifetime mortgage. The total amount you owe including the interest and charges must be repaid when you have left your home because you have died or need to go into long-term care.

 

So, my question is, does the above sound okay? Have they been mis sold an awful product and can we challenge this somehow. Are there any other financial options available to them, to enable them to get some more money for their retirement?

 

Many thanks

 

lisa

[rebel11]

Thread moved to the correct forum.

[Dotty50]

Hi Lisag,

 

How did your parents obtain the mortgage? Did they use an Independent Financial Adviser?

 

If they did, then your parents should have paperwork confirming the product details and the reasons why it was recommended to them.

 

Why do you think it was mis-sold?

 

A reputable adviser would/should advise the applicants to discuss this with their family/children prior to committing to it as it would obviously impact on any inheritance.

 

There were many of these products available a few years ago and with many variations but usually the property remains your parents, but after their deaths the house is sold and the mortgage paid off. If there is still equity after the sale and settlement then that would pass to whoever inherits.

 

This is the basic gist of it, you need to see the mortgage offer which would clarify all the conditions.

[Dotty50]

Hi Lisag,

 

How did your parents obtain the mortgage? Did they use an Independent Financial Adviser?

 

If they did, then your parents should have paperwork confirming the product details and the reasons why it was recommended to them.

 

Why do you think it was mis-sold?

 

A reputable adviser would/should advise the applicants to discuss this with their family/children prior to committing to it as it would obviously impact on any inheritance.

 

There were many of these products available a few years ago and with many variations but usually the property remains your parents, but after their deaths the house is sold and the mortgage paid off. If there is still equity after the sale and settlement then that would pass to whoever inherits.

 

This is the basic gist of it, you need to see the mortgage offer which would clarify all the conditions.

[lisag]

Hi,

 

Thanks for replying. It is just the level of interest and the rapid rate that it is rising that seems extortionate to me, and I wonder if they were properly informed of the consequences of their decisions.

 

I have looked through the paperwork and they did see an IFA, they were advised of four different products, the IFA seemed to recommend a Legal and General one, but they chose the Aviva one as they offered the most money.

 

I guess it is done now, for various personal issues (bereavement) around the time they needed the money, my parents went off and did this alone, and have only just started discussing it with myself and my sister. We cannot raise the cash between us to pay off Aviva now as the debt is too big, and we both have mortgages of our own.

 

I am wondering whether they should now look at a sell and rent back scheme, to see if they can get the maximum possible amount of money out of their property? There may just be enough to pay off Aviva, put 5 years rent aside (they could claim Housing Benefit after five years) and still be left with a little bit of money to improve their current situation, as their income is very low, and savings have gone.

 

Any thoughts on these schemes, or recommendations for a good company that might offer to do it? It does mean that they wouldn't be liable for maintenance and repair bills for the house anymore, which could be good for them long term.

 

lisa

[Dotty50]

Hi,

 

Thanks for replying. It is just the level of interest and the rapid rate that it is rising that seems extortionate to me, and I wonder if they were properly informed of the consequences of their decisions.

 

Yes it will increase rapidly if interest is not paid but they may have the option to make payments to it and it should be covered in the letter from the Financial Adviser, however you state that they didn't take the advice give and went for the different plan

 

I have looked through the paperwork and they did see an IFA, they were advised of four different products, the IFA seemed to recommend a Legal and General one, but they chose the Aviva one as they offered the most money.

 

I guess it is done now, for various personal issues (bereavement) around the time they needed the money, my parents went off and did this alone, and have only just started discussing it with myself and my sister. We cannot raise the cash between us to pay off Aviva now as the debt is too big, and we both have mortgages of our own.

 

I am wondering whether they should now look at a sell and rent back scheme, to see if they can get the maximum possible amount of money out of their property? There may just be enough to pay off Aviva, put 5 years rent aside (they could claim Housing Benefit after five years) and still be left with a little bit of money to improve their current situation, as their income is very low, and savings have gone.

 

Sorry I don't know about these schemes but would they buy for full market value? Probably not. Why can't they claim housing benefit now?

 

Any thoughts on these schemes, or recommendations for a good company that might offer to do it? It does mean that they wouldn't be liable for maintenance and repair bills for the house anymore, which could be good for them long term.

 

lisa

 

Sorry I can't help further!

[lisag]

Thanks Dotty,

 

They can't make repayments off of the lifetime mortgage because they don't have any excess income to do this.

 

If they sold the property now to a 'sell and rent back' scheme, they would not be able to claim Housing Benefit for five years due to the rules around entitlement for previous owners (I am a Benefits Adviser!).

 

Having researched this some more, and discussed it with my parents, I think long term renting the house back would feel insecure to them, we cannot guarantee that Housing Benefit will cover the rent forever, due to welfare reform and them having an extra bedroom.

 

I think the only possible option they may have is a home reversal scheme where they sell the property to a company who then lets them live there for life, rent free. They will of course get considerably less than the market value, but if they get enough to cover the Aviva Mortgage debt and some extra, it seems worthwhile rather than do nothing and the Aviva mortgage growing to be larger than the property value, which I think is very likely to happen within the next ten years or so.

 

I have left it with them to go back to an IFA, if they want to, to see whether this may be a possibility.

[Dotty50]

Oh dear, it's not an easy situation to resolve but make sure that your parents use a reputable IFA and I would certainly advise you to be at any meetings (with your sister too) to ensure your parents know exactly what they are signing up to. It may save a lot of misunderstanding at a later date.

 

Also beware of hefty penalties to get out of the Aviva mortgage!