Equity Release - Could I lose my home?
People who might benefit from Equity Release have long memories. They may well recall the horror stories about people who were looking for some help in retirement and ended up with houses being repossessed or huge debts which might even have passed to the next generation.
If a lifetime mortgage would be helpful in your situation, but you have those worries, please read on to find out what has changed and how to make sure you are getting the right advice.
In this article we are mostly concerned with a type of Equity Release called a Lifetime Mortgage. This is where you continue to own your home but secure a mortgage against it, much the same as ordinary house purchase.
There is another type of Equity Release called a Home Reversion Scheme where you intentionally sell all or part of your home for a discounted price but have a lifetime lease allowing you to stay in your home as a tenant. We don’t talk about this here but please ask for help if you have that kind of scheme in mind..
What went wrong with Equity Release?
We need to look back at a time before the Financial Conduct Authority administered meaningful mortgage regulation, before the Financial Ombudsman Service was available to deal fairly with complaints, and before the Financial Service Compensation Scheme covered the debts of firms that fail.
A typical example from the early 1990s was the Rainbow Scheme, which was offered by Fisher Prew Smith, an IFA firm, in conjunction with the West Bromwich Building Society. People in retirement were able to borrow money with the bulk of funds invested to provide income, often in a high yield investment bond.
The investment was supposed to produce enough income to pay the interest on the mortgage and leave some cash over for personal expenditure. Unfortunately, fixed rate mortgages were not available and the cost of borrowing could increase.
In the early 1990s the base rate was over 10% compared with the current base rate of 0.1%. The investment also had a variable rate of income which depended on how well the economy was performing. When the recession hit investments, income fell dramatically.
The result was that the declining income became insufficient to service the increasing mortgage interest. Borrowers relying only on their pensions were asked to find money to make up the difference, but this was often beyond their ability.
Some plan holders were allowed to roll-up the interest into the mortgage, but this could lead to negative equity where the size of the mortgage grew to more than the value of the property.
There were occasions when, once the house had been sold on the death of the borrowers, sons and daughters inherited this unpaid debt. There were other schemes which led to similar outcomes.
What’s changed since then?
In recent years, financial services regulation has been strengthened considerable with the specific aim of providing a much greater level of consumer protection. This covers the lenders who offer Lifetime Mortgages and advisers who act as intermediaries between you and the lenders.
Also, over the last 30 years, the Equity Release Council has risen to be a guiding force in ensuring that everyone involved with Equity Release including lenders, advisers, solicitors, surveyors and other industry professionals adhere to minimum standards of conduct. They have consumer safety at the heart of the organization. Let’s think about how this works in practice.
Lifetime Mortgage Lenders
Lenders who adhere to the Equity Release Council Code of Conduct must offer Lifetime Mortgages which have a fixed interest rate for the entire term. This means, until the borrower, or the second borrower for joint mortgages, has died or is forced to move to full time residential care.
This protects you from the runaway interest rates that might have been seen in years gone by. Also, they come with a “no negative equity” guarantee which means that the mortgage can never accrue to be more than the value of the property. No debts will be transferred to the next generation and your home can never be taken into possession.
A lifetime mortgage will usually have other properties to safeguard the borrower and their beneficiaries. At their discretion, borrowers can pay a part or all the interest to ensure that the amount due at the end is kept to a minimum.
If the interest is being rolled into the mortgage, the borrower can opt to protect a percentage of the equity for their family to inherit. Because it is a percentage of the market value, the £sterling amount being protected will improve if the property value increases.
Lifetime Mortgage Advisers?
The adviser you deal with will have passed an Equity Release specific examination which is at a higher level than ordinary mortgage advisers. They are then required to complete a minimum of ongoing study each year to ensure their knowledge and skill remains up to date.
They will complete a detailed fact find with you and encourage you to think carefully about your needs, this will include asking you to consider the alternatives to Equity Release. They will always offer you the opportunity for family members or other supporters to be present if you feel it would help.
Most importantly, they will do their best to ensure you understand the details of any plan you take out. This means providing you with a detailed illustration of the mortgage they recommend along with a written report to explain how this meets your individual needs and circumstances.
This explanation will cover things like the costs involved, whether you are protecting any equity, and what to do if you want to move home in future. They will explain if any additional money has been set aside for you to draw down when you need them, and the cost of paying the loan early if you come into a windfall.
Whilst doing this they will also ask you to think about other issues that we should consider in retirement such as future needs for lump sums or income, Wills, Powers of Attorney, gifts for family members, and so on.
How can I protect myself?
There are lots of ways to find help with equity release, of course, I’d encourage you to talk to us, but whoever you choose, the first thing is to check the authorisation of the adviser. You can do this by searching for their name in the register maintained by the Financial Conduct Authority.
I’ll apologise now - the process isn’t as simple as it should be, but it will keep you safe.
Search online for the FCA Register or go to https://register.fca.org.uk.
Type in the adviser’s name, click the box for “individuals” and click search.
If they are on the register, click on their name then scroll down until you see the boxes marked “Functions Requiring Qualifications”.
The last link you need is the one marked “Show Activities”, and you will be looking for reference to Mortgage Activity 21 – Advising or Arranging Equity Release Transactions. By way of an example, you can see my registration here.
If you can’t find them on the register, or if they do not have the accreditation for arranging equity release, you might consider looking for a new adviser.
When dealing with your adviser, make sure you understand upfront If there are going to be any fees and when the fee will be payable. Ensure you can communicate with them easily and that you get full and helpful answers to your queries.
Expect that you will be asked some searching questions about your current and future needs and to explore other methods of achieving your aims. This is so that the recommendation can be fitted to your specific needs and take into account your situation and concerns.
When you are offered a solution, make sure the mortgage has fixed rate for life and that there is a “no negative equity” guarantee. Only when you have received a written report covering the recommendation and an illustration from the lender giving all the details of the recommended lifetime mortgage, should you agree to go forward with the application.
One extra safeguard that we have not mentioned so far is the legal advice you will get in relation to the mortgage. We would recommend that the solicitor you use is affiliated to the Equity Release Council because they will manage your case in line with the Code of Conduct.
The solicitor is required to confirm independently and in writing that they believe you understand the Lifetime Mortgage and they are satisfied that you have made the decision safely.
What should I do now?
Knowing what you now know, you should contact us for a chat. We’d be more than happy to spend a bit of time with you, with no obligation on your part, to answer questions or explore whether a Lifetime mortgage could help with your needs or your plans. If you choose not to proceed, at least you will be better informed. If you do decide to go further, it can make a real difference to your retirement.