In 2008 Mr and Mrs Thompson were approved for an Equity Release (ER) loan with a lender. With an ER loan, people use the equity in their home as security for a loan. They are generally marketed towards older people who are asset rich and cash poor. The person does not need to make repayments, and interest on the loan continues to accrue.
When the person dies or moves into an aged care facility, the house is sold and the proceeds used to pay off the loan.
Mr and Mrs Thompson’s ER loan
Mr and Mrs Thompson drew down about $45,000 over 2008 and 2009. By February 2016 the loan balance had increased to about $105,000. The agreement included a ‘no negative equity guarantee’ which meant that if the sale proceeds were less than the loan balance, the lender would not seek payment of the deficit (it would effectively be written off).
Belinda comes to FSCL
In 2016, after finding out about her parents’ ER loan, Belinda (who held enduring powers of attorney for both her parents), came to FSCL with concerns about the loan being unethical. Belinda believed her parents did not receive proper advice before agreeing to the loan and said the lender had not followed correct process. Mr and Mrs Thompson had both begun to suffer from dementia, and Belinda was looking into their financial situation.
Belinda was concerned the loan terms were fixed for life and that Mr and Mrs Thompson were unable to make interest only payments or pay off the loan to stop compounding interest. Belinda was concerned that as a result, Mr and Mrs Thompson would lose all the equity in their home.
Belinda believed she and other family members should have been consulted by the lender before her parents were able to enter into the loan.
Belinda’s view was that the lender had not followed correct process and should agree to her parents repaying the sum borrowed ($45,000) but not the interest accrued (approximately $60,000). Belinda was also considering re-mortgaging her home to pay off her parents’ ER loan.
The lender’s view
The lender said it followed correct procedure when organising the loan. It said the loan was suitable for Mr and Mrs Thompson who were both over 60, and asset rich and cash poor. The lender ensured Mr and Mrs Thompson received independent legal advice. It also strongly recommended they seek financial advice as well.
When Mr and Mrs Thompson first took out their loan they signed a product disclosure certificate acknowledging their understanding of the product features, including that the balance would continue to increase, the possibility of reduced equity, and fixed rate break cost.
If Mr and Mrs Thompson wished to pay off the loan early, the lender would charge a “break cost”. As the interest rates at the time Mr and Mrs Thompson took out the loan were high, and by 2016 were very low, the break fee was going to be significant at approximately $32,000.
The lender had also made a compliance call to Mr and Mrs Thompson before the loan was taken out in 2008, to ask whether the beneficiaries of their estate were aware of the loan. Mr and Mrs Thompson said that the loan had been discussed with family.
Belinda did not accept the lender’s explanation and referred her complaint to FSCL.
We noted that Mr and Mrs Thompson had received independent legal advice and financial advice, and it was reasonable for the lender to rely on this fact.
Mr and Mrs Thompson had also signed a form acknowledging their estate would be liable for the repayment of the loan, and that this decision would affect their estate beneficiaries. Mr and Mrs Thompson’s solicitor signed a form confirming he had advised Mr and Mrs Thompson of the potential effects of the ER loan on the beneficiaries of their estate, and had asked whether they wished to consult those beneficiaries.
We also noted the compliance call from the lender to Mr and Mrs Thompson which recorded they had discussed the proposal with their estate beneficiaries.
We found that the lender had followed the correct process in granting the ER loan to Mr and Mrs Thompson, and that Belinda’s complaint should not be upheld.
We also found it was reasonable for the lender to rely on:
a) Mr and Mrs Thompson having received legal advice from their solicitor and financial advice from their mortgage adviser, and
b) the compliance call during which Mr and Mrs Thompson confirmed they had discussed the ER loan with their family.
Changes to credit laws in New Zealand in 2015 mean there are now greater obligations on lenders granting ER loans to make more in-depth enquiries of customers about their objectives in taking out the loan, and into their financial position. These greater responsibilities did not exist at the time Mr and Mrs Thompson were granted the ER loan in 2008. In any event, the ER loan appeared to be a suitable product for Mr and Mrs Thompson, they were both aged over 60, and had sufficient equity in their home.
Belinda had been unaware of her parents’ ER loan, and not being familiar with the concept of ER loans, was concerned about the erosion of equity in her parents’ home. However, this did not mean the lender had not acted correctly in granting the loan in 2008. We also suggested Belinda take both legal and financial advice if she were considering breaking her parents’ ER loan.