Counting the cost of equity release

Older people in equity release schemes run the risk of being forced to sell their homes, writes Laura Slattery

Older people in equity release schemes run the risk of being forced to sell their homes, writes Laura Slattery

Older people who sign up to equity release schemes risk the prospect of having their homes sold against their wishes if they go into long-term care.

That was the financial regulator's stark warning as it recently published its guide to using your home to generate the cash sum that many older people need to pay for living expenses, including care.

Age Action says it has been contacted by customers of equity release companies who have experienced "nightmare situations", including one woman who entered into an equity release scheme intending to use the money to pay for a bed in a nursing home, but found that six months later, the company forced the sale of her home.

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Clauses in equity release agreements aimed at older people state that if the person leaves the house for more than either six or 12 months, the scheme will terminate. In practice, this means that the house must be put up for sale.

"This was never explained to the woman. She thought the house could be left to her children on her death," says Gerard Scully, Age Action's information officer.

The organisation has also been contacted by an equity release customer who signed up to a fixed-rate equity release loan and was then charged a penalty of €35,000 when, following an accident, she went to end the agreement after six months so she could sell her property.

In another case, which Scully says he finds worrying, a couple were prevented from selling their house by the equity release provider, which didn't want to sell because property values were still rising. Their legally binding agreement stated that both parties must agree to a sale.

Both the financial regulator and Age Action fear that the number of disputes between older homeowners and equity release companies will escalate as the schemes become more popular.

The regulator estimates that 2,500 people took out equity release products in the Republic last year, but with the 60-plus population expected to increase by 35 per cent over the next decade, the market is forecast to grow.

Of all the difficulties that equity release customers could face, it is perhaps the idea that their home could be sold just months after they enter a nursing home that is the most daunting.

Moving into full-time care is often a traumatic change in itself, without having to cope with a financial services company pressing for the house they have lived in for most of their lives to be sold as soon as a mere six months later - an act that would completely cut the person's links to their pre-care lives.

"If it looks like you're going to be a permanent resident, generally the companies would consider that a trigger for a sale," says Greg Kirk, from the regulator's consumer information department.

Somewhat reassuringly, it is usually not in the interest of equity release companies to trigger a sale early, Kirk adds, because it stops them from enjoying the benefits of any subsequent increase in the value of the house.

Bank of Ireland, which sells a type of equity release scheme known as a lifetime mortgage and is the only mainstream bank in the market, says none of its customers has yet had to repay their loan because they left the home for more than six months to go into a nursing home.

But under its terms and conditions they would have to repay the loan in full at this point, and unless they have other money they can use, they would have to sell their house to do so.

Although there is no formal option for a family member to step in at this stage and renegotiate the mortgage so that it could be repaid in monthly instalments, the bank told The Irish Times that it would consider repayment proposals with customers "on a case-by-case basis" should the situation arise.

Another lifetime mortgage provider, Seniors Money, which has a longer 12-month "ceasing to reside" condition, hasn't triggered a sale yet either, having been in business here for just a year. It also promises to be flexible and has endorsed what it describes as the financial regulator's cautionary tone.

"We try to be as sensitive and realistic as possible," says Derek Handley, the company's commercial director.

"At any time during that 12 months, you are entitled to come to us and look for a 12-month extension, giving you 24 months in total."

Entering care is always going to be an emotional, turbulent time.

"People commonly wouldn't know how long they're going to be in a nursing home when they first go in. They might go in for three weeks and then it ends up being a long-term situation," says Handley.

Losing their home will be the point at which they realise there is no going back.

Handley says Seniors Money tries to encourage people to "keep us in the loop" and says much of the loan agreement is "just legalese". But to put it another way, homeowners need to remember that the agreement they are signing is a legally binding one, and often they will be forced to rely on the goodwill of the equity release provider. It is not just the question of a sale being forced or prevented. Equity release schemes restrict homeowners' freedom in a variety of ways.

One potential sore point is that owners need to get the permission of the company if they want to make adaptations to their home - often the very reason people need to raise cash through equity release in the first place. This problem is most acute in the case of home reversion schemes, where older people sell a share of their property to a company in exchange for a lump sum.

"They might need to put in a lift or a ramp as a result of a disability, but because these modifications will decrease the property's value and the home reversion company's return depends on this value, it can be difficult to get their consent," says Kirk.

The nub of most financial dangers faced by equity release customers is that nobody knows what's going to happen in the future. As Scully puts it, "If you take out equity release to enjoy yourself on a world cruise and then five years' later you need it for nursing home care, what do you do?"

Older people are vulnerable, Kirk adds, because they have no future income to help them recover from a bad financial decision.

And if they are mis-sold a home reversion product, they won't have the option of making a complaint to the financial ombudsman. These products are classed as property transactions and are currently unregulated, although an inter-agency group, including the Department of Justice and the Department of Finance, is examining how they may be regulated in the future.

Age Action wants all equity release schemes to be monitored by a single regulator sooner rather than later. It also wants the Government to clarify how the Tánaiste's plan to recover the cost of nursing home care from people's estates by taking up to 15 per cent of the value of the person's home will interact with a type of "variable share" reversion scheme sold by a company called Shared Home Investment Plan (Ship).

Under this plan, the share owned by Ship increases by 1-2 per cent every year. If homeowners live long enough, there may not be 15 per cent left to pay for nursing care.

Despite its misgivings, Age Action says it recognises that there is a market for these schemes, largely because most financial institutions refuse to lend large sums to older people.

"Older people are extremely vulnerable in relation to property, but I wouldn't want to say that equity release companies are preying. I think there is a market niche there, partly created through ageism," says Scully.

While equity release companies will presumably make nice profits, older people can face financial abuse from a source closer to home - their own family.

"Older people have the right to choose to spend the kids' inheritance if that's what they want. There is a pressure put on people to preserve the inheritance and it actually amounts to abuse," says Scully.

People who enter into private arrangements where a family member buys the property but they retain a lifetime right of residency should ensure that this lifetime interest is legally binding, he cautions.

"It sounds terrible to say it, but depending on the goodwill of your child is not good enough."

Equity release companies sometimes suggest that homeowners use their lump sums to pay for a deposit for their adult children's first homes. But such a move could leave older people in a sticky predicament without even having had the benefit of enjoying the lump sum themselves.

"You have to weigh your immediate needs against your future needs, which are very uncertain," concludes Kirk.

"Your home has a value. You can only spend that value once, and once you spend it, it's gone."