‘Aviva hiked my parents’ equity release fee from £2,000 to £12,000 overnight’

A family has hit out at a “lack of morality” at one of Britain’s largest insurance companies after their parents’ equity release exit fee skyrocketed from £2,276 to £11,662 within two weeks.

Alison Evans was stunned by the “greed” of insurer Aviva when it refused to waive an early repayment charge on an equity release loan taken out by her elderly parents 20 years ago.

Ms Evans and her siblings were charged £11,662 to pay off a £45,000 loan that their parents had taken out in March 2003. The debt on the loan, taken out to fund home improvements, had snowballed to £167,696.

Equity release deals allow homeowners to withdraw cash from their ­properties. A record 13,000 new borrowers took cash from their homes in the third quarter of last year, with £1.7bn withdrawn by all equity release borrowers – another record.

Equity release loans compound over time leaving families with enormous debt to clear. Usually, loans must be paid off when the property is sold or the occupants go into long-term care.

Today, equity release companies offer “no negative equity guarantees”, but few protections existed before the industry was regulated in 2004.

To avoid the debt growing any larger, Ms Evans’s family decided to pay off the loan when they moved their elderly ­parents into sheltered accommodation.

They believed they would not be charged an exit fee because of a document on Aviva’s website that states such fees are waived after 15 years.

It was not clear to Ms Evans that the 15-year rule only applies to some of ­Aviva’s loans – not her parents’.

There was another nasty surprise awaiting her. The penalty on the loan was linked to the yield on government debt or “gilts”. Because of the link, this kind of early repayment charge is extremely volatile. Unlike loans with fixed fees, the size of the penalty depends on how much gilt prices have changed since the loan was taken out.

This left the family at the mercy of the bond markets just as they went into meltdown after Kwasi Kwarteng’s mini-Budget. Between Oct 17 and Oct 28, the charge grew fivefold from £2,276 to £11,662 – money Ms Evans and her ­siblings had to scramble to find at the last minute.

The final fee was 26pc of the initial amount borrowed, a level no longer considered acceptable by today’s ­industry standards. Ms Evans was in disbelief Aviva would not waive the charge given how much the family had already paid the company.

“The £45,000 loan has been repaid more than three times over. What more could they want?”

Experts say gilt-linked early ­repayment charges – which are still included in some contracts – have no place in the industry.

Lynda Blackwell, a mortgage expert formerly of City watchdog the Financial Conduct Authority, said: “For a sophisticated, investment-savvy customer, willing and able to take the risk – OK. But for ordinary, older and potentially vulnerable customers, it’s a huge gamble. No one could ever forecast how gilt prices move.”

Borrowers who took out plans over a decade ago and now need to pay them off will be facing “massive penalties” because of the movements in gilt markets, Ms Blackwell said.  

Most, but not all, exit penalties are fixed at between 1pc and 10pc of the initial amount borrowed. Many also taper as time goes on, as with a conventional mortgage, so the borrower pays 10pc in year one, 9pc in year two and so on until it expires.

Stuart Powell, of Ocean Equity Release, a broker, calculated that a borrower who wanted to exit a £100,000 loan after six years would pay £5,000 if there was a fixed charge, but if the charge was gilt-linked they could pay as much as £25,000.

Ms Evans has complained to Aviva, which has refused to waive the fee. It said it would have done so if the borrowers, Ms Evans’s parents, had moved into long-term care, as set out in the terms and conditions of the loan. Her parents have moved into sheltered accommodation with 24-hour support, but Aviva said this did not meet their long-term care criteria.

A spokesman for Aviva said: “We understand that this has been a difficult time for the family, and we are sorry that they are unhappy with the outcome of their case. We carefully reviewed the circumstances following contact from the family, but unfortunately there was no additional evidence to enable us to change this decision.”

Ms Evans said: “We feel strongly that Aviva is taking advantage of our two elderly and mentally frail parents. This is corporate greed at its worst.”