Robert and Sarah agreed to out a lifetime mortgage of £100,000 on the advice of a financial adviser. When Sarah wanted to sell the house, she felt they should never have been sold a lifetime mortgage.
What happened
Robert and Sarah each had a private pension, but they wanted to increase their income for their retirement.
Robert met a financial adviser to discuss the best way to do this. The adviser recommended they cash in their endowment policies to pay off their existing mortgage and take out a lifetime mortgage. This was for £100,000. They used some of the money to buy a new car, refit their kitchen and visit some family abroad.
Eight years after taking out the mortgage, Robert sadly died. Sarah decided their house was too big, so wanted to sell. She would then go from a three-bedroom house to a flat in a nearby retirement village. But this also meant she would need to pay off the lifetime mortgage.
There was £50,000 left of the loan. But because Sarah wasn’t moving into long-term care, she’d have to pay an early repayment charge of £25,000. When added to the accumulated interest, paying off the mortgage cost her nearly £250,000.
Sarah was very upset and frustrated with this, so she complained to the adviser. She felt the mortgage’s terms weren’t clearly explained to Robert, who dealt with all their financial matters. They hadn’t understood how the compound interest would build up.
Sarah said that Robert had explained to her that it was the same as an ordinary bank loan. She felt that Robert wouldn’t have agreed to the mortgage if he’d known how it would turn out.
The adviser stood by what they’d said, so Sarah complained to us.
What we said
Because Robert had met the adviser on his own, we couldn’t get the customer’s account of what was said in the meeting. But we thought the way he described the loan to Sarah was a good indicator of how he’d understood it.
But that didn’t mean the adviser had done anything wrong. We had to establish the couple’s circumstances at the time, and whether they’d received appropriate advice.
We looked at the information the adviser had recorded about Robert and Sarah’s finances. It appeared that their outgoings had been around £1,000 each month. This included their existing mortgage, which had had three years left. They also had around £35,000 in savings accounts and premium bonds.
Even though they had a mortgage, Robert and Sarah had endowment policies in place to pay it off. After their outgoings, they still had around two thirds of their income left each month.
After eight years, there was still half of the money raised. And what they had spent was in fairly small amounts. We thought the couple could have afforded these expenses without the loan. Even if they’d needed extra money, there would have been cheaper ways of getting the small sums they were spending each time.
We felt that paying off the existing mortgage with savings then replacing capital with released equity was a very expensive way of raising money. This method had cost Robert and Sarah more that repaying their existing mortgage would, which they weren’t struggling to do. And in three years, the mortgage would have been paid off, reducing their outgoings further.
We decided Robert and Sarah should never had been sold the lifetime mortgage. We wanted to make sure Sarah wasn’t out of pocket.
When she sold her house, Sarah was left with considerably less equity than she would have had if they hadn’t taken out the lifetime mortgage.
We told the adviser to pay the difference between the balance of the sale that went ahead, and what the balance would have been if Sarah hadn’t had to pay off the lifetime mortgage. This would be taking off what they had already spent.