Don’t let anyone you know get conned into taking out an EQUITY RELEASE loan!

Apologies if today’s post is not directly relevant to you in your financial situation at your time of life. But we all know people who are either about to retire or who are retired. What we probably don’t know – because people of that generation are often reluctant to talk about money – is that these people are being aggressively, even viciously targeted by Equity Release companies.

As part of my research for my next book, I went to a supposedly free seminar recently all about ensuring “a financially secure retirement“. In fact it was just a hard sell session for Equity Release. What was deeply worrying was the queue of people at the end all signing up to arrange for the salesman to visit them in their homes to discuss them taking an Equity Release loan.

What is Equity Release? Many older people are what financials services companies call “asset rich, cash poor“. They have houses (assets) which may be worth quite a lot of money. But because their pensions have performed so badly and because annuity rates and interest rates are so low, these people may be struggling to find enough money to have a comfortable retirement. They have a tough choice – sell their homes to generate some cash or continue to struggle. This makes them perfect targets for smooth-tongued, unscrupulous salespeople proposing that these people can stay in their homes by taking out a loan against their homes – a loan that doesn’t have to be repaid till they either move into a nursing home or die. Sounds pretty good!

So what’s wrong with Equity Release? The interest rates. Interest rates on Equity Release are only a couple of percentage points above a mortgage. So they sound like a good deal. But over 15 to 20 years, this small difference in interest rate can add up to a huge amount of money.

Just one example – if someone takes out an Equity Release loan of �53,000 (that’s the average size) when they’re 66, they’ll owe about �200,000 by the time they’re 86. In comparison, if their children had added �53,000 to their mortgage (to help their parents out), then they would only have had to repay about �95,000 over 20 years. So the family (parents and children) would be �105,000 better off (�5,000 a year) if that �53,000 loan had been added to the children’s mortgage rather than being taken out as an expensive Equity Release loan.

Let me give you a quote from a family which found out their parents had been conned into taking out an Equity Release loan:

My mother is 70, her husband my stepfather is 72. The house was worth �120,000 and they borrowed �22,000 at just over 7% fixed. If you consider the average age expectancy for a woman is 86, then the �22,000 soon becomes a huge amount of money. In our case, if my mother reaches 86 then the house will be gone by the time she dies. Had she told us what she was intending, then we would have given her the �22,000 just so she did not get ripped off. If your parents are talking equity release and you are in a position to give, beg, borrow or steal the money to allow your parents not to take out the equity release, then this is the answer.

Hopefully that’s pretty clear.

Each month or so I get a booklet from an Equity Release company – I think it’s called Retirement Solutions – pushing Equity Release and full of stories of happy, healthy pensioners who have been able to take the holiday of a lifetime, visit their grandchildren in Australia, Canada or wherever, finish a home extension etc etc thanks to the generosity of the Equity Release business. Just wait till payback time comes and see how happy and smiling they are when they find out that a small, supposedly manageable loan has mushroomed into a mountain of debt that will leave their heirs penniless.

Equity Release may work for a few people – those who intend to leave little to nothing for their children or relatives after their deaths and who don’t plan to save anything for care home fees. But for most people, it’s an expensive disaster. So, please please talk to any retired people you know, ask if they’re being pestered by Equity Release salespeople and warn them that seemingly small Equity Release loans can wreck their family’s financial future�(while ensuring a comfortable living for the Equity Release seller).

(If any readers or people readers know have taken out Equity Release, I’d be interested to know if they’re satisfied or whether they’ve realised that they’ve made a serious financial error. I’ll publish any answers)