Equity release explained Home income plan mis-selling
Many people were mis-sold home income plans in the 1980s
Home income plans were an early form of equity release. Around 10,000 people were sold equity release schemes (including home income plans) in the 1980s and many thousands were mis-sold. It was arguably the first and the worst financial services mis-selling scandal, and accounts for many people's distrust of equity release schemes even now.
Home income plans - what were they?
Home income plans involved taking out a mortgage on your home, part of which was invested in a high-risk financial product.The interest on the loan was added to the amount borrowed (known as a roll-up loan), which meant that interest accrued on interest, making the debt rise rapidly. The part of the loan that was invested was supposed to provide income for the borrowers and cover the interest building up on the loan.
But these schemes rarely worked and were completely unrealistic in their assumptions. Worse, the risks and downsides were rarely explained to the people, mostly pensioners, who took them out.
What went wrong
Interest rates spiralled, but, much like today, the stock market fell, meaning the investments linked to the mortgages also fell. This left people with dwindling investments but a growing debt and no means of repaying it.
These particular schemes were banned by the regulator for financial services in 1991. But by then, thousands of vulnerable people had been trapped. Later in the early 1990s, some people did receive compensation for the poor investment advice they received but, ironically, many used it to try to reduce their debt.
Mortgage advice wasn't regulated until 2004, so the advice to take out a high-risk loan was rarely taken into account when compensation was awarded. Those people who were recommended just roll-up loans, with no investment, received no compensation at all.
Our request to the lenders
The only winners in this sorry mess are the lenders. They had no legal liability for the sale of these schemes and cannot be sued for redress. However, they are still earning huge profits from these schemes because of interest that is accruing on the loans.
In 2002 we wrote to all the lenders who still had home income plans on their books asking them to 'freeze' the interest accruing and to be content with the huge profits they have made already. They all refused.
Things have moved on in the lending world, but not for the victims of home income plan mis-selling. We intend to write to those lenders and put our request to them again. Watch this space for the results.
- If you're unsure about whether equity release is the best option, speak to one of our experts on the Money Helpline
- For alternative options, take a look at our guide to annuities
- Read our complete guide to planning your retirement
