Money Times: Why Lifeloan got a Liveline roasting
Last week, Joe Duffy’s Liveline programme devoted considerable airspace to ‘Lifeloan’ the Bank of Ireland equity release mortgage that was launched in 2001 and withdrawn in 2010.
Callers, mostly the children of older people who took out these loans made the same complaints that have been laid against the bank for the last several years:
- that the 6.9% compound interest for the fixed rate and term loan was exorbitant;
- that the way the capital and debt would grow, especially if they lived into advanced old age was never fully understood;
- that the loss of asset value would negatively impact on the Fair Deal nursing home funding scheme (which was only introduced in 2009)
- and that they would never have proceeded with the loan if they’d known how small an inheritance they would end up leaving to their heirs.
Having written widely about these equity release and home reversion products I don’t doubt that some people should not have been sold them, even if all the safeguards - of taking legal advice and consulting with trusted family members were followed.
Being warned about the downsides doesn’t always translate into genuinely understanding them however, especially when you have a real need for the cash and there are no other options available (except to sell your home.)
A fortnight ago I wrote about the relaunching of the Seniors Money equity release loan by their new retail division, Spry Finance. The company first arrived in the summer of 2006 with a 5.5% interest rate and more favourable lending and repayment terms than its competitors. Unfortunately it got caught up – I think unfairly - in the negative stories that Joe Duffy’s callers were telling about their experiences with Bank of Ireland.
The problem for them was not just that the compound interest their mostly elderly relatives did not have to pay during their lifetime had turned into a very large debt indeed, (interest at c7% doubles every 10 years) but that the value of their property had let them down very badly.
Back in 2001, for example, no one would have been more surprised than their owner that their modest, ageing 1970s three bed semi-d with the nice garden had achieved a market value many times its original price, say, €250,000. By 2006, the same house could easily have been worth €500,000 if it was in a ‘desirable’ city neighbourhood. You can understand why a 65-year-old owner would have been keen to draw down a €100,000 Lifeloan, 20% of its market value.
Yet by 2011 the owner would have struggled to find a buyer at €200,000; by 2016, the debt would have doubled to €200,000 and their old house have been worth €300,000 - €350,000. Property prices have recovered further since then, an ordinary 1970s three-bed semi is unlikely to be back at its pre-crash value unless it had undergone a pretty dramatic make-over. In 2006 even a €100,000 Lifeloan wouldn’t have gone that far.
The risks associated with home equity/home reversion loans were well publicised in the 2000s with borrowers required to take legal advice and advised to discuss it with their adult children. Late to the game, the Financial Regulator eventually laid out the pros and cons of the loans in a 2007 consumer booklet.
In late June 2002, just as equity release loans for all homeowners were taking off, including for older people with paid off mortgages, I wrote the following about equity release loans in general:
The argument for extending your mortgage looks at the concept of financial security very differently [from the security of paying off a mortgage]. Its supporters say the amount we own in our houses is now disproportionately high compared to what we owe. They say that someone with a house worth £350,000, a remaining mortgage term of less than 15 years and monthly repayments of just £350 (the equivalent of a £40,000 mortgage) can afford to double the mortgage [to £80,000] and still enjoy a huge amount of asset security.
What they are assuming however is a) that the house market is stable; b) that you have a secure, sufficient income; c) controllable debt (such as credit cards, personal loans) and d) a properly funded pension.
A stable property market is something that can't be guaranteed, but it is crucial if you are borrowing up to 75% or 80% of the value of the property. A collapse in house prices could push you in "negative equity" - the situation where the mortgage is worth more than the house.
Home equity loans – even the Bank of Ireland one – always included a negative equity guarantee that precluded the older borrower from eviction. That safeguard still applies but it hasn’t prevented some elderly Bank of Ireland home equity borrowers from finding themselves in much reduced financial circumstances today.
These over-60s reverse mortgages have a place in this post-crash heavily regulated and supervised market. Nevertheless they also come with serious risks for someone with limited means who is drawing down equity in the asset that represents the bulk of their wealth – their family home.
Caveat emptor is the most important message we should take from Joe Duffy’s callers.