Bank of Ireland's Life Loan on Joe Duffy

Was listening to it today. Some folk don't seem happy to see the inheritance disappearing
 
Certainly there are plenty of people out there who really, really don't understand what "compound interest" means. There is a an issue with people's financial literacy. She says "I understand compound interest" but the fact she is shocked the loan amount, where there have been no principal repayments, doubled in ten years means that she genuinely didn't understand it. It would have been interesting to find out what she thought it should be?

The break out clause seems a bit of a kick in the teeth though.
 
I heard both reports. In both cases the elderly adult were fully informed of what they were signing up for. Not only that in Orla's case they actively went looking for the money. Because I listen to these stories with a cocked ear and because of my experience on here I take notes to try and figure out the facts

Orla's mother.

Background

She was 80 in 2005 and needed money to pay off the father to leave the house as there was a problem between them. They got 165K at 6.5 % compound interest. There was no other option to get the money other than BofI. The mother was fully with it and Orla was involved in helping her get the loan. They knew what they were signing up for. This product was particularly suitable because there were no repayments. So it would seem to me they were grateful to get the loan.

Today 2015

Orla is now livid with the bank, because she feels that the repaymount amount at 300K is too high. Her logic on this is that because interest rates were so low then ergo she's paying too high a rate, an incredible rate. Even though that is what they signed for. She wants to pay, but not that amount. It's not fair. She also doesn't understand why the bank won't negotiate a reasonable rate now. That paying 100% interest is not fair. (ie doubling of original amount borrowed, she was ignoring the compound interst to suit her argument). She also is upset with the inflexibility of the bank and doesn't understand why older people were charged so much.

Questions

1. Was the interest rate fair.
2. Was everything done above board
3. Was everybody aware of what they were signing up for
4. Did they understand compound interest

My opinion to those questions is yes.

Inheritence

On day 2 Orla was asked by Burgess did she need the money for the care of her mother who now lives with her, one would get the impression from her reply that she did, but the previous day she stated that her mother was upset, distraught, at the fact that her grandchildren's inheritence is gone

Bank

Why was the interest rate 6.5%. Well it's not a mortgage, they are getting zero repayments, they take the risk of property going down, because if the mother lived long enough or property tanked, the only amount they could ever get was the value of the property. So that risk is factored into 6.5%.


18K Breakout clause

If the loan is repaid before the borrower dies there is an 18K penalty. I presume this is to cover the bank in the situation of a quick repayment, they need a few years go go by to be making money on the loan. It is not uncommon a clause in any loan product. Also there is no penalty if the mother went into a care home (someone might clarify this is what she said) Now that the mother is living with the daugher I would argue this 18K should be waived by the bank because it's equivelent to going into a care home.

Note: Bronte hates banks, but I try to be fair. Do I think banks are unscrupulous. Absolutely. Do banks mis sell. Absolutely. Will bank staff do anything for commissions. Absolutely. None of those applied to the first two cases were heard on RTE radio. The third case was different and it was also a different product.
 
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so-crates said:
Certainly there are plenty of people out there who really, really don't understand what "compound interest" means. There is a an issue with people's financial literacy. She says "I understand compound interest" but the fact she is shocked the loan amount, where there have been no principal repayments, doubled in ten years means that she genuinely didn't understand it. It would have been interesting to find out what she thought it should be?

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But there is no difference to this loan than any of the mortgages any of us have had, they are all compound interest so depending on our interest rate we could easily pay double the amount borrowed or more. When I started off mortgages were around 17% with Irish life. I can remember fixing at over 9% myself at one stage. Even today I'm paying over 4% on one mortgage. In this case there were no repayments, so the hit is you have to suddently pay a large lump sum, but you knew that when you signed up for the loan.
 
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Bronte said:
18K Breakout clause

If the loan is repaid before the borrower dies there is an 18K penalty.
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Hi Bronte

Great summary.

I spoke afterwards to Greg Allen the guy who designed the product for Bank of Ireland back in 2001. He hasn't worked there for some years. It is very clear. There is no early repayment penalty if the house is sold for any reason.

So either
1) We misunderstood Orla
2) Orla hasn't understood the contract properly.
3) Orla wants to pay off the loan early and keep the house.

A break out fee is normal in a fixed rate mortgage. If there were no fee, then when interest rates rise, people who fixed would get all the benefits. But when interest rates fall, they could break out of their fixed rate deal and avail of lower rates.

I am not 100% certain, but from memory, the BoI documentation had a table showing how much the balance would be every year for 15 years.

Brendan
 
She mentioned that they were going to left with very little. But they got 165K to use meanwhile which she misses, yes it apparently went to the dad but they got it all the same, and they couldn't get it any other way. If it's worth 400K now and she has to pay 300 or 318 well that's very little but it ignores the 165 originally got 10 years ago and that borrowing money costs money.

They have to pay an extra 135K interest for having that money for 10 years without paying anything. They also get whatever equity is in the house. That too was not clear. She also said she wanted 'to exit on a reasonable figure' . I don't understand why she wouldn't tell you how much the house was valued at in 2005, she clearly knew or had a ball park figure because she said it had been valued at an 'inflated rate' at that time.
 
Bronte said:
But there is no difference to this loan than any of the mortgages any of us have had, they are all compound interest so depending on our interest rate we could easily pay double the amount borrowed or more. When I started off mortgages were around 17% with Irish life. I can remember fixing at over 9% myself at one stage. Even today I'm paying over 4% on one mortgage. In this case there were no repayments, so the hit is you have to suddenly pay a large lump sum, but you knew that when you signed up for the loan.
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I'd still be very curious as to what she thinks is "fair". She went on a great deal about how unfair and unreasonable the bank were and that they were willing to repay but not repay double the amount so I'd like to see what "willing to repay" translates to in real hard cash terms. I think she may have looked at the table outlining the costs when they took out the loan and promptly put the whole thing to the back of her head and thought no more about it. I would hope she understands the concepts behind compound interest but I'd say she never truly absorbed the meaning in "pounds, shilling and pence".

Brendan Burgess said:
Hi Bronte

Great summary.

I spoke afterwards to Greg Allen the guy who designed the product for Bank of Ireland back in 2001. He hasn't worked there for some years. It is very clear. There is no early repayment penalty if the house is sold for any reason.

So either
1) We misunderstood Orla
2) Orla hasn't understood the contract properly.
3) Orla wants to pay off the loan early and keep the house.

A break out fee is normal in a fixed rate mortgage. If there were no fee, then when interest rates rise, people who fixed would get all the benefits. But when interest rates fall, they could break out of their fixed rate deal and avail of lower rates.

I am not 100% certain, but from memory, the BoI documentation had a table showing how much the balance would be every year for 15 years.

Brendan
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Certainly from what Orla said I understood that the breakout was because of the house sale while her mother was still alive - it did seem a bit far-fetched but she seemed definite on the matter.
 
so-crates said:
Certainly from what Orla said I understood that the breakout was because of the house sale while her mother was still alive - it did seem a bit far-fetched but she seemed definite on the matter.
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I listened back to it just now. This is what she actually said:

"There is a break out clause of €18k because she is living with us. We are trying to sell her house but we can’t at the moment and the bank is telling us that we have to pay this amount. "

and later

"I should point out that, God forbid, if my mother did pass away, , that we wouldn’t pay the €18k”"

I appreciate fully that people muddle up their words in live interviews. But this seems particularly misleading. If they sell the house, they don't pay any early repayment penalty. If they don't sell the house, but want to exit the loan early, they pay an early repayment penalty.

Seems totally reasonable to me.
 
so-crates said:
I'd still be very curious as to what she thinks is "fair". She went on a great deal about how unfair and unreasonable the bank were and that they were willing to repay but not repay double the amount so I'd like to see what "willing to repay" translates to in real hard cash terms.
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Orla didn't suggest a figure. But David did. "The loan was 25,000 and is now 86,000" "We offered 50,000 in full and final settlement"

An ordinary listener might think that an offer of 50,000 for 25,000 was reasonable. But the 25,000 was IR£25,000 or €32,000 and it was granted in 2001, or between 14 and 15 years ago. His offer amounted to an interest rate of 3% when they signed up to an interest rate of 6.9% fixed.

Brendan
 
Yes I noted the figure David approached the bank with and the currency confusion. I don't know why but I got the impression Orla's percentage would have been lower. Perhaps because they were starting from a much higher figure. She seemed slightly nonplussed by what David offered.

Her wording was confused - it certainly left me with the impression that the break clause kicked in because of the sale.
 
My understanding on Life Loan was:

There is no break fee at all ever ever if the house is sold for any reason.
 
Black_Adder said:
My understanding on Life Loan was:

There is no break fee at all ever ever if the house is sold for any reason.
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I don't think this was Orla's main gripe.

I was discussing the life loans with my husband yesterday. And how they could be beneficial to us when we are older. Say our investments went sour for some reason and we were elderly and living in our home worth a few bob but cash poor, low pension. Why shouldn't we be able to take out some equity when we are in our seventies to see us to the end. To pay for a conversion to the house for being old, to pay for better health care or home help, to have extra heating in winter, or to go on a cruise if we so wish.

We are perfectly aware people, we know what compound interest is, we know that with zero repayments the amount owing will go up massively, it's exceedingly difficult when you are not earning any more to get a loan, this type of Life loan can be brillant if needed as long as one understands it and the interest rate or terms aren't too onorous.
 
Hi Bronte

I was responding to this:

"There is a break out clause of €18k because she is living with us. We are trying to sell her house but we can’t at the moment and the bank is telling us that we have to pay this amount. "

Just on that point - no break fee if they are selling house.
 
I listened to yesterday's show. Brendan was of course totally right.

Possibly we are emphasising the compound interest effect too much. In Orla's case only 30K of the 135K interest is in fact due to compounding, I think she would be complaining even if there were no compounding. The problem here are the optics of the rolled up loan. For a mortgage even at these low interest rates a person will typically pay back more than twice what was borrowed but one does not hear people retrospectively bemoaning this fact. If Brendan is correct and BoI actually illustrated the effect of rolling up the loan then it is difficult to see any case at all for the complainants.
 
I see this story is front page in today's Indo. Whilst Charlie Weston does not actually state that there is a scandal here I am disappointed that he has let the overall sensationalist tone suggest that there is one. No smoking gun here, I am afraid, Charlie.
 
"People shocked when chickens come home to roost" doesn't have quite the same effect on newspaper sales as "Avian threat: Winged interlopers invade". it is a terrible article.

Thousands of elderly people are facing a massive debt time bomb on their homes after taking out equity release products.
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By the nature of the product, unless they require a second injection of cash, the elderly people themselves are not facing any debt timebomb. In fact the banks have probably had to accept some losses on these because of the dip in property prices.

He very quickly changes it from the elderly though to "families". I
But many families are now finding that the amount owed leaves them with nothing when the homes are sold, wiping out inheritances.
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At least he seems to have got a fairly clear statement from her on the nature of the breakout clause

Repaying the loan before her mother dies will trigger a €18,000 "break-out" charge, as the loan is fixed at 6.5pc for 15 years.
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Which doesn't seem to be quite in line with Brendan's post above (though I note the "15 years" so I wonder if we are actually getting a true picture).
 
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