A widow has told of her horror at losing £1 million to an eye-watering equity release bill on her beloved family farm.
Jane Horton and her late husband David were given the 35-acre spread in the New Forest as a wedding gift in 1975.
But after raising two daughters and growing old in their Hampshire home, David was killed in a 2013 riding accident, leaving Jane to run the farm alone.
Loses: Jane Horton was told she would have to pay £1m to clear a £384,000 equity release loan before she could sell her farm
After eight tiring years, Jane, aged 72, finally decided enough was enough and put the farm on the market.
Yet instead of being able to enjoy retirement, she was stunned to discover she would have to pay £1million to clear a £384,000 equity release loan the couple had taken out 13 years earlier.
The shock bill, which experts say shames the equity release industry, included more than £500,000 in interest charges and an exorbitant £96,000 early exit penalty. It left Jane with little more than half the proceeds from the sale of the farm.
More than 100,000 borrowers are feared to be trapped paying rolling interest charges of more than 6 per cent because of extortionate exit penalties.
Jane and David were both 26 years old when they took over the farm. It was rundown and they knew they had a challenge on their hands.
What is equity release?
Equity release typically involves a lifetime mortgage, whereby people can borrow against their home and opt not to make monthly payments, with the interest instead rolled up until the house is sold, potentially after death.
It is only available to those over-55 and there are limits on how much of a home’s value that can be borrowed.
There are options to reduce the financial impact of the loan, for example, making interest payments or only drawing down money in smaller amounts when it is needed.
Equity release can help the asset-rich but cash-limited live a richer retirement, or do essential home improvements to plan for their later years.
However, there are pitfalls to this and financial and inheritance implications, so it is important to take financial advice, discuss it with your family and consider it very carefully.
Potential borrowers may also be better off downsizing to release some cash, or taking a traditional mortgage or retirement inters-only deal.
It is essential to ask advisers about all these options.
As our story shows you must also check exit fee costs carefully.
You can request a free guide to equity release here
But before long, they had set up a successful riding school, having built barns and stables and designed a cross-country course for their customers.
The property was the couple’s pride and joy. ‘It was a beautiful small farm,’ says Jane. ‘My late husband loved it to bits.’
In 2008, they considered retirement, but David was concerned about the size of his pension. They also had outstanding debts to repay.
So the couple approached a mortgage adviser, who recommended releasing £384,000 of equity from the property.
Equity release loans are available to homeowners aged 55 and over. Borrowers do not have to make any monthly repayments, with the loan instead repaid when the last surviving owner dies or goes into long-term care.
But monthly interest repayments are rolled up and added to the loan, which can cause the debt to snowball.
Jane and David’s equity release loan from Prudential charged 6.87 per cent interest.
This meant that in the first year alone, £27,000 of interest was added to their loan. And due to the nature of compounding interest charges, by year 13 their annual interest bill had rocketed to almost £62,000.
At that rate, Jane’s debt was growing by £170 a day, or £7 every hour — outstripping the minimum wage of an 18 to 20-year-old at £6.56.
But Jane, a retired teacher, did not understand the true scale of the spiralling charges until she came to sell the farm and discovered that the £384,000 loan had wound up costing more than £500,000 in interest.
Wedding present: The former family farm in the New Forest which was gifted to Jane and her late husband David as a wedding gift in 1975
‘We never asked for an equity release mortgage,’ she says. ‘We’re intelligent people but somewhere along the line we got talked into it.’
And Jane has since discovered, since digging out her original loan agreement, the mortgage adviser pocketed a hefty £7,120 in commission from Prudential for recommending the loan.
Jane says David took care of their finances, including filing the annual statements which would show how much the debt had grown each year.
To add insult to injury, she was also hit with a £96,000 penalty for repaying the equity release loan early.
This is because Prudential linked its repayment charges to the Bank of England base rate, which at the time was 5 per cent.
The small print stated that should the base rate drop by 1 per cent, there would be a £96,000 exit charge. Just two months after taking the deal, the base rate began its rapid descent to historic lows.
The only way to have avoided the penalty, had they needed to sell, would be if the base rate had remained at 5 per cent for 28 years.
The couple had been aware they would face a penalty if they decided to repay the loan early, but did not understand the punishing small print.
So when Jane was handed a settlement figure of £996,572, including interest, the original loan and early exit penalty, she was horrified.
Accomplished rider: The late David Horton competing in horse trials in 1987. He was tragically killed in a riding accident in 2013
She says: ‘I don’t think we truly understood how much the interest rate would notch up or how difficult it would be to extricate ourselves from the deal.
‘I think it was mis-sold to us. Yes, we decided to take it out, but the advice wasn’t good enough when you consider how serious the outcome can be, how quickly the debt can grow and how difficult it is to get out of.
‘I want to warn other homeowners, you’re tied in so tightly there is no wiggle room to change something you made a choice about 13 years ago.’
Jane had notified Prudential of her husband’s death in 2013 but aside from being asked for a death certificate, she says she was offered no support from the lender at all.
The exit penalty was tied to the base rate, but many older policies have a charge linked to the performance of government bonds, known as gilts.
Prudential has refused to waive even part of the punitive £96,000 exit fee, despite making more than £500,000 in interest from their farm in 13 years
Insurance giant Aviva, which has more than 100,000 equity release customers alone, and lenders Legal & General and Just all still levy the penalties in line with gilt-yields.
Broker Stuart Powell, managing director of Ocean Equity Release, believes such fees should be banned.
He says: ‘I have yet to hear a convincing argument that gilt-based exit fees are good for customers.’
Earlier this year, Money Mail revealed how as many as 300,000 equity release borrowers could save an average of £33,000 if they were prompted to switch to a cheaper rate.
Mr Powell also wants all borrowers to be contacted by an adviser every two years to have their deal reviewed.
He says: ‘Jane and David benefited from none of the modern equity release features like a compassion clause, allowing you to repay the debt and interest accrued, exit penalty free, within three years of the death of your husband or wife if they were party to the loan.
Their case also shows how important it is for the equity release industry to look after vulnerable borrowers not just when the loan is sold, but in the years after.’
Yet Prudential has refused to waive even part of the punitive £96,000 exit fee, despite making more than £500,000 in interest from their farm in 13 years.
Switching equity release deals
Some borrowers may find that hefty early repayment charges make switching equity release deals uneconomical, however, others with legacy products could find better rates now.
It is important to get financial advice when doing this and check if you are comparing all equity release loans available.
This is Money works with Age Partnership as an equity release partner because it compares deals across the whole of the market.
You can compare costs and read our guides to equity release here.
The lender, which stopped offering equity release in 2010, says it is not required to contact its borrowers except to send an annual statement and did not have to tell Jane to speak to an adviser before repaying her debt and incurring the charge.
A spokesman says: ‘Mr and Mrs Horton’s lifetime mortgage was an advised sale and their financial adviser at the time should have set out how the product would work.’
Regulator the FCA says it has clear rules that regulated firms should treat customers fairly.
It says the consequences of equity release can have a significant impact on consumers’ financial wellbeing, which makes it important that firms give the right advice from the start.
A spokesman for the Equity Release Council, the industry trade body, says: ‘Lifetime mortgages are designed as long-term commitments that give customers lifelong guarantees and protection against interest rate rises, negative equity and the risk of repossession — typically until they pass away or move into permanent care.
‘Regulated financial and legal advice make the benefits and costs of these protections very clear before anyone commits to taking out a plan.’
Thousands are trapped in bad deals. So will the FCA step in?
By LYNDA BLACKWELL Former head of mortgages at the Financial Conduct Authority
The equity release sector talks a lot about how it has changed for the better, offering customers today fairer, more flexible and better-value products.
But stories like that of Jane Horton shine a light on the poor-value products offered in the past, in which many thousands of customers remain trapped.
Unless you are an experienced investor or get support from a specialist adviser who is experienced in investments and wider macro-economic trends, it’s not easy to understand the risks and likely costs associated with gilt-linked early repayment charges.
It’s a huge gamble for the borrower — and the adviser, too. They need to understand what’s likely to happen to interest rates and gilt yields and be prepared for the risk that it won’t necessarily end well.
It is a product much more suited to high-net-worth individuals or sophisticated investors, who can afford the downside, not older, potentially more vulnerable customers, needing to manage their finances carefully into later life.
The quality of advice is key. And yet, the FCA’s report last year into the equity release sector’s advice and sales process does not make for encouraging reading. In too many cases, the FCA found that the advice given was not in the best interests of the consumer.
Sadly, Jane is not going to be alone in this. There may be better-value products on offer for lifetime mortgage customers today, but it’s a very different story for the many thousands of borrowers trapped in legacy books and having to put up with the limited and poor-value products that were available to them in the past.
On any reading, it is not a great customer outcome, particularly for customers who are in vulnerable circumstances.
The FCA has, in the past, intervened to protect retail customers who do not have the experience to assess and manage the risks involved with retail products.
It has also intervened in the mainstream mortgage market to help those borrowers trapped on poor-value products. It remains to be seen whether they will do the same here.
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