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‘Aviva charged me £22,000 to cancel Dad’s equity release loan even though he’s presumed dead’

·4-min read
Your Money - Bruce Mackie - Equity Release case Study - Aberdeen - Stuart Nicol
Your Money - Bruce Mackie - Equity Release case Study - Aberdeen - Stuart Nicol

A family who lost their father in tragic circumstances was dealt a further blow when an equity release lender made them pay a £28,000 exit fee on three loans he had taken out on the family home.

Ernest Mackie, 78, was last seen on the north coast of Aberdeenshire on Nov 30 2011. Despite an extensive search that involved divers, mountain rescue crews and a helicopter, no trace of him was ever found.

“My sister and I knew he was dead,” said his son, Bruce Mackie, 57. “Whatever happened, he wouldn’t have survived the conditions that night.”

While the family were still reeling from their sudden loss, Mr Mackie discovered that his father had taken out three equity release loans with Aviva dating back to 2001. In total his father withdrew £62,000 from the home, but compound interest had made the debt swell to £142,500.

“I quickly cottoned on to how these horrible things work,” Mr Mackie said, “and I realised that if my mother, 75 at the time, lived another 10 or 15 years, the debt would grow to as much as £320,000 and there would be no equity left in the home.”

The idea of his mother reaching extreme old age with no financial backing was “unacceptable” to Mr Mackie. So he decided to pay off the loans by remortgaging his house. But there was another nasty surprise awaiting him: an exit fee initially set at £22,000.

Your Money - Bruce Mackie - Equity Release case Study - Aberdeen - Stuart Nicol
Your Money - Bruce Mackie - Equity Release case Study - Aberdeen - Stuart Nicol

Lifetime mortgage lenders impose an early repayment charge (ERC) to cover their losses when a borrower pays back earlier than expected. According to the Equity Release Council, the industry’s trade body, ERCs may be dropped out of compassion after a major life event. But despite the Mackie family’s ordeal, Aviva, which said it reviews exit fees on a case-by-case basis, refused to waive the penalty. To make matters worse, in the three months Mr Mackie spent imploring Aviva to drop the ERC, the fee grew by 26pc to £27,800.

While some ERCs are fixed, others are linked to the price of government bonds (gilts), so when the loan is taken out not even the provider will know what the eventual charge could be. Unfortunately for Mr Mackie, gilt prices had soared to record highs since his father had released the equity.

Stuart Powell of Ocean Mortgages Group, an equity release firm, has been campaigning to have “complicated and confusing” gilt-linked ERCs banned. “Most advisers find it difficult to explain gilt-linked ERCs to their clients,” he said. “So how can we expect clients to understand them?”

Once the more common form of exit fee, variable ERCs now make up just 13pc of the market – down from 54pc in 2020, according to Key, an equity release firm. Prominent mortgage advisers such as Lynda Blackwell, a former head of mortgages at the City watchdog, the Financial Conduct Authority, had complained that the obscurity of the charges made it impossible for customers to assess the risks of releasing equity.

As of October last year, Aviva allows new borrowers to choose between a gilt-linked or fixed-rated ERC. But it continues to sell products with gilt-linked charges, as do a handful of other providers. Some, such as ­More2Life, offer only fixed-rate ERCs.

Meanwhile, borrowers who have older deals are still having to pay a gilt-linked ERC to get out of their loan. If a loan pre-dates 2004, when a cap on ERCs was introduced, the fee may be more than 25pc of the initial loan.

A spokesman for Aviva said it had refused to waive Mr Mackie’s ERC because the impact of the gilt-linked penalty had been “explained” to Mr Mackie’s father and because “Mrs Mackie was continuing to live in the property and did not need long-term care”. This meant “there was no obligation to repay the loan”, the insurer said.

Mr Mackie said Aviva’s refusal to drop the “extremely unfair charge” in light of his father’s disappearance was “greed”. He said: “All I was asking was that they show my family some compassion.”

Mr Powell said the FCA should make it compulsory for every borrower to have a review of their lifetime mortgage every two years to give them the chance to remortgage to a lower rate and prevent the debt from spiralling out of control.

But Mr Mackie said families should steer clear of lifetime mortgages ­altogether. “By the time they die or sell the house, there might be nothing left in it,” he said.