When a life loan goes wrong...

[Bronte]

As a result of this and other reasons, such as the rapidly ballooning amount owed due to the compounding effect of the deferred repayments (at higher than market rates of interest), these loans are very uncommon in Ireland.

A few weeks ago we had a very good example on how those loans if managed carefully can be beneficial, but here's where it can go wrong

https://www.telegraph.co.uk/money/property/equity-release/lender-seizes-mans-home-after-equity-release-loan-balloons/?recomm_id=0d765cf8-3abd-4bdb-bfba-61501bae806d

A man is facing losing his home after a judge ruled that a lender was within its rights to seize the property to recoup an equity release loan taken out by his parents nearly 20 years ago.

David Regan, from Dewsbury, West Yorkshire, is being forced to give up possession of his three-bedroom house to lifetime-mortgage lender Pure Retirement after failing to repay a £172,000 loan within a year of his mother’s death.

Mr Regan’s parents, Joseph and Betty, borrowed an initial sum of £42,000 in August 2005 using an equity release scheme with a fixed interest rate of 6.64pc.

However, because interest was charged on both the original loan amount and any previously added interest, the size of the debt ballooned by £130,000 by the time Betty Regan died in August 2024.

Equity release schemes are increasingly being https://www.telegraph.co.uk/money/property/mortgages/equity-release-loans-homeowners-mortgage-property/ (touted as a way to solve Britain’s retirement crisis) by unlocking the billions of pounds bound up in the property market.

Last month, consumer group Fairer Finance presented recommendations to Lucy Rigby, the economic secretary to the Treasury, urging the Government to make sure property wealth becomes part of normal financial planning.

When Mr Regan inherited the property, where he also lives, he was left to repay the six-figure debt which, under the terms of the contract, was due upon both his parents’ deaths. Joseph Regan died a few months after signing the loan agreement.

Deputy District Judge Jackson of Huddersfield County Court ruled that Mr Regan must leave the property by Oct 21 or face eviction by High Court enforcement officers. Pure Retirement, which took over the loan from Mortgage Express in 2020, did not respond to a request for comment.

 

[Brendan Burgess]

There is no evidence that this loan went wrong.

It fully served its purpose.

The parents borrowed £42000 over 20 years ago at a fixed rate of 6.6%

So they got the money to use - we don't know what purpose - maybe to adapt the home for reduced mobility or to insulate it to make it more comfortable. Maybe they enjoyed a month long cruise every year.
And they got a fixed rate protecting them from increases in the future.
And they probably had a guarantee of no negative equity.

Even at simple interest.
20 years at 6.6% = £55,776

At compound interest, the total interest would be £109,933

The balance should be £42,000 + £110,000 or £152,000


Nothing went wrong - the parents had the use of £42,000 for 20 years.

The son was unable to buy the house or repay the loan. That is not the parents' problem. It is his problem.

It may well have saved the parents from having to sell their home and rent or sell their home and trade down.

 

[ClubMan]

It's the Telegraph which probably explains the biased clickbait headline and approach to the story.

 

[DazedInPontoon]

There's argument for a third thing going wrong - his parents not understanding clearly the consequence of the loan, specifically that compound interest is "the 8th wonder of the world" as Buffett said, which has dire implications when you're the one funding it.

We'll never know of course, but it would be interesting to know if they'd still have taken the loan if they knew it would be a £172k debt later.

 

[getting_on]

Mummy might never have told him, it being difficult news to break.
What will you do when I'm gone son?
Don't you worry about me mum, I've been watching that Jamie Oliver and anyway I'll always have a roof over my head, won't I?
Thanks to you and Dad, best parents in the world!

 

[Brendan Burgess]

it would be interesting to know if they'd still have taken the loan if they knew it would be a £172k debt later.

I have looked at the documentation for these loans in Ireland. And they all show projections over 20 or 30 years.

The UK were ahead of us in these products, so I am guessing that they knew full well.

 

[Fortune]

his parents not understanding clearly the consequence of the loan,

It seems likely that he also did not understand the consequences of the loan.

 

[getting_on]

It seems likely that he also did not understand the consequences of the loan.

The father died within months of taking out the loan, the mother lived for another 19 years.
So it sounds like it might have been a dying man's attempt to sort out their affairs and give his wife a bit more comfort.
If instead, the arrangement had been for the son to give his mother £45 p.w. cash in hand over those years, he'd own the house outright today
instead of being homeless.

 

[Bronte]

There is no evidence that this loan went wrong.

I agree with you. As does 99.9% of the comments under the article.

It's the Telegraph which probably explains the biased clickbait headline and approach to the story.

It's not just the Telegraph, they put a lurid headline on lots of stuff to draw in readers. Nowhere can I get a copy of the judgment to see what happened, so it's likely two reporters were in the court and wrote the article based on that, they could have added in detail on what the loan was originally used for, how much the house was worth, if the 'son' had paid anything towards rent on the property, paid utilities etc.

And they probably had a guarantee of no negative equity.

Article says this:

Guardrails to prevent beneficiaries from falling into debt were introduced in 1991 with the “no negative equity” guarantee. This ensures that lenders cannot claim more than the value of the home sold, even if the loan exceeds it.

Some experts said in the article that:

In 2005, the same year the Regans took out their loan, the Financial Services Authority, then the UK’s financial regulator, found that more than two thirds of financial advisers were not taking adequate measures to ensure products were suitable for their customers.

More recently, the Financial Conduct Authority warned a number of equity release advisers were prioritising commissions over giving proper advice. It also found some were failing to discuss alternatives open to homeowners to free up cash, such as downsizing.

 

[TomEdison]

The UK had a major financial services scandal in 1990s — the penson mis-selling scandal — about people being sold expensive products that were inapprpriate to their needs or circumstances. That led to a big review of the marketing of financial services, and a tough new regulatory regime covering, among other things, the requirement to match products to customers' needs and circumstances, and the very full (perhaps over-full) disclosure of information to customers.

So I'd be a bit surprised if, in 2005, Mr Regan's parents were mis-sold a reverse mortgage, or that the implications of letting interest mount up for 20 years were not pointed out to them. There would have been a high degree of awareness within the mortgage broking/sales profession about the importance of this. But it is possible.

But a possible factor herse is that Mr Regan Snr died a few months after the loan was drawn down. It's possible that he acted on behalf of the couple in arranging the loan, and that he was more conscious than his wife of the consequences of allowing the loan to mount up for many years.