When Stan Keech, 78, suffered serious heart and lung problems last year, he and wife Janet, 77, decided to sell their home in Devon and move to a flat nearer their children.
The illness had left Mr Keech unable to walk and out of reach of his daughter Jannine, who lives three hours away in West Sussex.
But the elderly couple got the shock of their lives when they tried to sell.
They were trapped by a hidden catch in a ten-year-old home loan — they couldn’t move to a ‘leasehold’ property, which most flats are.
The only way out was to pay a staggering £20,000 early-exit penalty, eating into money they need for old age.
Like tens of thousands of other over-55s, the couple had taken out an equity-release loan to see them through retirement.
Equity release is like a mortgage without the monthly repayments: you borrow a chunk of money that has to be repaid only when you die or sell the house. Meanwhile, the interest rolls over, pushing up the debt each year.
Ordinarily, you can take these policies with you when you move home. However, transferring an equity-release policy to a leasehold property can be treacherous.
Unlike with freehold, you only have the right to live in your home temporarily, until the lease’s term expires.
The three million leasehold properties in Britain are mostly flats, new-style retirement villages and smaller properties — the type most popular with people downsizing in old age.
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Or they will let you move to leasehold only if you pass an ‘internal test’ set by the equity-release provider, which guarantees it gets a good deal on the move.
This catch is buried in the small print. Lenders rely on financial advisers to guide customers through the pitfalls.
If transferring the policy proves impossible, you must repay the whole loan immediately — a move that can trigger a ferocious early-exit charge. The fee is waived if you are moving into full-time care, but it must be paid if you are downsizing to be nearer family or a more suitable retirement village.
HOW EQUITY RELEASE WORKSEquity release comes in two forms — a lifetime mortgage or a home-reversion plan.
With a lifetime mortgage, you get a tax-free lump sum as a loan. The lender will often allow you to take another chunk later in retirement or set up regular withdrawals.
How much you release depends on your age, health and the property’s value.
There is no interest to pay until you sell the house and repay the loan, or die. Instead, the interest rolls over every year and is added to the debt — so you pay interest on the interest. This is expensive. Typically, a loan will double after 11 years. Unless house prices soar, this can quickly eat away your equity.
The alternative is a so-called home-reversion plan. With this you sell all, or a chunk, of your home in return for a lump sum or regular income and the right to remain living there.
When you die or move into long-term care, the firm you sold it to will be entitled to its share of the property’s value. So if prices have risen, you will give more money back.
Unfortunately for Mr and Mrs Keech, every suitable place near their daughter in Ashington, West Sussex, was leasehold. And they failed to pass their lender Aviva’s rigorous test — a complex calculation based on age and length of lease.
It was impossible to take the loan with them. The couple’s only option was to repay the whole loan, triggering a huge early-exit charge of 25 per cent.
This £22,000 hit left them able to afford only to rent, rather than buy, a flat near their family.
Including interest and charges, the total bill to cash in their plan early came to £111,000 on a £47,000 original loan taken out in 2003, when Mr Keech’s health was already deteriorating.
Mr Keech, a former engineering consultant, says: ‘This is totally immoral. We were under the impression it would be simple to move to a new flat if we needed. At no time was an early-repayment charge mentioned.’
Jannine, 43, says: ‘When we looked around we found there was nothing that wasn’t leasehold. It has been a terrible strain on all of us.’
The Keech family’s protests have been turned down by their adviser, Bay Associates, so they are taking their case to the Financial Ombudsman Service.
Bay Associates declined to comment. Aviva offered to pay six months’ rent as a gesture of goodwill as — although it was not at fault — it wanted to alleviate some of the stress caused to the Keech family.
Dean Mirfin, of specialist equity-release adviser Key Retirement Solutions, says: ‘We get regular calls from people who are having trouble with leasehold. This is why we ask every client what their long-term plans are.
‘If you need flexibility to move, either equity release is not right for you, or we will need to look closer at your potential plans and get the right type of policy.
‘Sometimes you can get around a leasehold problem by extending the term.’
By law, every leaseholder has the right to add extra years to the lease. But this has to be negotiated with the freeholder and can cost thousands. It is also tricky to arrange if you are trying to move into a new home.
Always speak to a specialist financial adviser signed up to the industry code of conduct. See equityreleasecouncil.com or call the Equity Release Council on 0844 669 7085.