Icelandic chill hits the Costa pensioners
Hundreds of pensioners living in Spain fear they could lose their homes in the sun after signing up for an equity-release scheme with failed Icelandic bank Landsbanki.
Many owe more than their properties are worth. Some of the elderly homeowners took the money because they needed to pay for medical treatment.
Under the terms of the Landsbanki equity release scheme, borrowers could take a quarter of what they raised in cash, but had to put three-quarters in an investment fund run by Landsbanki.
The borrowing is charged interest at a European bank rate plus 1.75%, making the rate roughly 6.45%. There is also a 1.2% management charge for the investment.
Borrowers claim they were promised that returns from the investment would be enough to pay for interest charges, plus a little extra.
The pensioners face peril on two fronts. First, the investments are not paying income, so interest owed is racking up. Second, they fear administrators may call in all debts and repossess their homes.
After Landsbanki collapsed last month, the equity-release part of the business, which came under Landsbanki Luxembourg, was taken into administration by accountant Deloitte.
So far, around 600 expats, many in their 70s, are known to have signed up to the Landsbanki equity-release scheme.
It was sold by local financial advisers and advertised in local papers and on the British Chamber of Commerce in Spain website.
John Hemus, 72, moved to Moraira on the Costa Blanca in 1988, after retiring as an engineer. The father of five, married to his third wife Gilly, needed to borrow money in 2006.
A financial adviser visited him and he borrowed €440,000 (£348,000) - the total value of his property.
Mr Hemus says that in the first few months the income covered interest payments. But after that, as Landsbanki's investments began to deteriorate, the fund stopped making money. No income has been paid by the fund this year and as a result the expats have been unable to make repayments and their debts have been mounting.
In May, the financial adviser who sold the plan and a representative from Landsbanki visited Mr Hemus to tell him he had a fortnight to pay €30,000 (£23,700) in interest.
'I was stunned. Where did they expect me to find the money? I told them it was impossible,' he says. They said I could have another 12 months, but that interest would keep building up.'
At the current rate of interest, Mr Hemus needs to pay back more than £2,000 a month just to break even. Last month, his debt had reached €50,000 (£39,400). This was when Landsbanki went bust and Deloitte took over.
Now, hundreds are worried that the administrators could force them to repay the money they borrowed - and, for many, the only way to do this is by selling their homes. But the Spanish housing market has plunged by more than 30% in some regions, so even if they could sell, there is not enough equity in many of these properties to pay back the amount they owe.
(from This is Money)