Lifelong loan that seemed like a life sentence

Lifelong mortgages were supposed to suit older people who were on low and irregular incomes. But now critics say they have unfairly trapped borrowers in high interest rates for years.

It was 16 years ago when Friederike Barkow, a German citizen living in Kent, took out a lifelong mortgage of £28,500. She has now paid an estimated £10,000 in interest over and above what was necessary to service the loan.

Lifelong mortgages work on the basis that rather than repay the capital, borrowers keep paying the interest until either they die or the property is sold. The problem for Ms Barkow was that the interest rate was at the bank's standard variable rate. While almost everybody else could remortgage into lower rates, she was locked into the higher one.

Ms Barkow was 62 when she needed to find a mortgage to buy the flat she was living in, after having been a resident in this country for over 20 years.

She was receiving a regular income as a self-employed translator but found it hard to find a lender. Eventually she was sold a lifelong mortgage from the Bank of Scotland by the now defunct IFA Berry, Birch and Noble Financial Services based in West Wickham, Kent.

According to the terms and conditions of the the 50-plus mortgage plan it was set up "on a basis where interest only is payable and the capital is only repaid on the eventual sale of your property (whether this occurs as a result of a house move or upon the second death of you or your partner)."

These terms made it clear she could not remortgage unless she sold the property or died.

She says: "I had no choice but to take it. I couldn't get another mortgage because I was German, I was too old, I was self employed and my employer was not British."

However, unbeknown to Mrs Barkow, this mortgage policy was scrapped by the Bank of Scotland three years into the life of her loan. It also changed the terms to allow people to remortgage with just a fee of £150 to release themselves from the deal.

But the bank failed to inform her of this change, and for the past 16 years she has paid excess interest of £10,000, according to James Cotton of Bath-based London and Country Mortgages.

He says: "Had Mrs Barkow been allowed to remortgage over this period she could have saved herself a conservative estimate of £9,120 over the 16 years."

She would still be in the dark if a neighbour in the flat above her had not died. Knowing that his property was to be sold and converted in the next year, and not wanting to live in a building site, she decided to sell.

Her financial adviser, Ruth Whitehead, then discovered the bank's error.

She says: "Bank of Scotland should have told Mrs Barkow that her terms and conditions she signed up to were waived three years into it. The reason why it was so imperative she was told was because she felt she had no option but to carry on paying this loan for the rest of her life.

"She always felt that she couldn't get out of this - she was told that the only way it could be paid off was by either moving or dying - neither of which she wanted to do.

"It would have been entirely feasible for her to have paid off this mortgage by now if she been told sooner and had taken a repayment mortgage. How many other people have been locked into a deal like this?"

Ms Whitehead was told by the bank: "It's the client's responsibility to keep up to date with what was the best deal for her circumstances at any given time and that Bank of Scotland couldn't write to everyone when things changed."

Mr Cotton says: "Now there are certain requirements on the lender to alert a customer of when a deal finishes." Had the loan been taken out more recently he says "the bank would have had to let her know that the deal had finished."

What of people today in their 50s who need a mortgage but can't tick the lenders' boxes in the traditional way?

Mr Cotton says it would still be difficult to find a competitive mortgage. "She may have struggled with some lenders today as she would have come across the same issue with her income," he adds.

But there are now more options available to non-UK citizens. Lenders such as Intelligent Finance, Standard Life and Halifax all look at lending to people who have only lived in this country for a short time and are over 50.