Mis-Sold Equity Release Schemes – What you Should Know
Equity release is currently safer than it has ever been, as it is well regulated. This means that if you ensure your equity release lender is regulated by a reliable body, you can trust that you will be able to release equity safely.
This is because regulatory bodies have rules about how equity release must work, and lenders who are regulated must follow these rules. This ensures equity release customers receive all of the necessary information about equity release, and that the advice they get is professional and neutral.
Regulatory bodies also study equity release and produce annual reports on how the scheme has functioned each year. This helps them to establish new rules for equity release that increase its success and its safety for customers and lenders.
On the other hand, though equity release is generally very safe, if you choose an unregulated lender, you could end up being a victim of a mis-sold equity release scheme.
As with any scheme, there are companies looking to scam their customers, so you must make sure your lender is reliable — and the easiest way to do this is to make sure they are regulated.
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Who Regulates Equity Release?
The two main bodies that regulate equity release in the UK are the Equity Release Council (ERC) and the Financial Conduct Authority (FCA).
The Financial Conduct Authority does not only regulate equity release; it regulates a variety of financial services firms and financial markets. This means you may be familiar with the organisation even if you are not familiar with equity release.
When it comes to equity release, the FCA regularly publishes reports that help the general public to understand what equity release is being used for, and whether it is being rolled out safely.
For example, the 2020 report outlined that equity release was mainly used for home improvements/repairs/adaptations, paying off debts including mortgages, and funding an earlier retirement or allowing the homeowner to reduce their hours at work (1).
The report also found that unsuitable advice was one of the main causes of unsafe equity release.
Some examples given were: customers not being aware of compound interest, meaning they did not realise how much debt they would be in; and younger customers not being informed of alternatives to equity release, including traditional mortgages.
The Equity Release Council specifically works on equity release, and it has standards for equity release lenders and solicitors that are updated regularly.
Currently, the product standards are: consumers have the right to move home after releasing equity, consumers must be able to stay in their home for the rest of their life or until they enter permanent care, consumers must be able to make penalty-free payments, interest rates must be fixed or capped, and products must have a no negative equity guarantee (2).
The ERC also produces annual market reports with important statistics about equity release.
For example, in the Spring 2022 market report, we were told that equity release is now six times larger than it was in 2011, and that the average equity release customer can take out an amount of money that is ‘equivalent to over seven years of the typical single pensioner’s post-tax income’ (3).
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What are Some Signs Of Mis-Sold Equity Release Schemes?
Below, we outline some of the signs of mis-sold equity release schemes:
1. Poor Advice
One of the biggest signs of a mis-sold equity release scheme is that the homeowner is talked into it by an equity release adviser.
This may look like the adviser not being honest about the cons of equity release, not discussing all of the possible equity release plans, pushing the homeowner to make an application to a lender quickly, and not explaining the features and risks of equity release in great detail.
Reliable equity release advisers tend to offer a personal illustration to their clients, as this demonstrates exactly how the client is going to be affected by taking out equity. If they are not happy with the potential results, the adviser should not pressure them to go ahead with equity release.
Something else professional advisers should do is encourage their clients to do research for themselves, and to speak to their family members about equity release.
If they don’t do this, it is possible that they are exploiting vulnerable homeowners, as there is more chance they will agree to release equity if they have not spent time considering their decision.
Please call our 24-Hour Helpline: 0330 058 1579
2. Individual Applications
Another sign of a mis-sold equity release scheme is that an adviser or lender will encourage the homeowner to make an individual application for equity release, without explaining how this would affect their partner further down the line.
Though you can apply for equity release individually, if you never add your partner to your plan, they may end up in a vulnerable position if you pass away before them, or if you need to go into long-term care before them.
This is because the equity release lender would sell your home and take the money that you owe them from the sale, so your partner could end up either in poverty, or in a challenging financial situation, unless they have enough savings to fund the rest of their retirement. Either way, they would have to vacate their home, which is certainly not ideal.
If the homeowner is informed of the potential consequences of making an individual application and they are happy with this, we would not consider this a mis-sold equity release scheme.
However, we have heard stories of customers not being aware of this, and their partner can end up in a very unfortunate situation as a result.
3. Lack of research into other options
When you go to an equity release adviser, they should make you aware of all of the options that are available to you.
This is because you are not necessarily going to benefit from equity release, so it is important that you are able to do research into the various options to decide which one is best for you.
Unfortunately, some customers are victims of mis-sold equity release schemes as they were not informed that another option would be more suitable for them, and this means they get into debt without needing to.
For example, a homeowner of 55 years may be encouraged to release equity to fund their retirement, but they would in fact be eligible for a traditional mortgage, that they could afford to repay through working, which would result in them being in less debt.
4. Unsuitable plans
Sometimes, a mis-sold equity release scheme looks like an adviser recommending an unsuitable plan to their client.
Equity release is experienced very differently depending on which plan you select, so it is vital that your adviser introduces you to all of the options, and only recommends a plan that would benefit you.
For example, a homeowner may choose an interest only lifetime mortgage as their adviser informs them that they will be in less debt with this arrangement, but the homeowner cannot afford to make repayments on the interest.
In this situation, the homeowner could be penalised for not repaying the amount of interest they had agreed to, and this could result in a tricky situation. They may be able to switch schemes, but this could be costly and time-consuming.
Another example is that an adviser may tell their client to get a buy-to-let scheme as this would allow them to release a large amount of money.
However, they may not inform them that they have to rent out a property with the loan if they select this option, so they cannot spend the loan on anything they want.
This would mean that the customer could be limited with their options, as they may be unable to afford certain things that they intended to purchase with equity release, such as home improvements, a new car, or holidays.
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5. Lack of explanation of inheritance tax
Generally, inheritance tax is less of an issue when someone releases equity. This is because the value of their estate is reduced, so they tend to not reach the threshold for inheritance tax, and this means their family does not have to pay tax on the money they inherit.
However, if a homeowner gifts money to a loved one from their equity release funds, if they die within the next seven years, the family member will have to pay inheritance tax on the money they received.
If homeowners are not informed of this beforehand, they may gift money freely, and this could negatively affect their family. Instead, they should be taught exactly how inheritance tax works, and how it relates to equity release.
6. Lack of explanation of all charges
There are various charges involved with the equity release scheme, and some customers have been victims of mis-sold schemes as they were not informed of all of these charges.
Firstly, customers will be charged initial fees for releasing equity, relating to the administration, the legal fees, and the application fees. These costs vary depending on the lender the customer is with, the location they live in, and the advisers and solicitors they employ to help them.
Next, the equity release customer should always be aware of the interest rate that they are going to be charged, and whether it is fixed or variable.
Though they will not have to repay the interest, it is still important to know the rate, as it will affect how much money the lender takes from their property sale.
Finally, if any early repayment charges are included in the scheme, the customer must be aware of this. Sometimes, the lender does not make this clear, and customers end up having to pay a large amount of money to exit the equity release scheme, without being prepared for this beforehand.
This is particularly bad when the homeowner is a new equity release customer, as early repayment charges tend to be higher when the homeowner has not long released equity.
It is also bad when the loan amount is high, or if none of it has been repaid, as the fee tends to be charged as a percentage of the remaining loan amount.
If customers are aware of early repayment charges set by lenders, they are able to find a lender with no charges, pay back some of their loan with a voluntary repayment arrangement, or wait a few years before exiting the equity release scheme.
Please call our 24-Hour Helpline: 0330 058 1579
How Can You Avoid Mis-Sold Equity Release Schemes?
Fortunately, there is plenty of advice out there about how you can avoid mis-sold equity release schemes. Here are our main suggestions.
1. Find a regulated lender
This is the best advice we can give, as it ensures the guidance you receive is completely unbiased, and covers all of the nuances of equity release. It also means you have a place to go if you need to make a formal complaint about a lender.
There are some cons of equity release that you will not even have to consider if you find a lender that is an Equity Release Council member. For example, with an ERC lender, you will always be permitted to move house, avoid early repayment fees, and obtain fixed or capped interest rates.
2. Shop around for lenders
Do not settle with the first lender you meet with, as they may not meet your needs in the same way that another lender would. We advise you to make a list of what you want in a lender, and find one that ticks off the majority of your list.
For example, if you are set on fixed interest rates, add this to your list and prioritise lenders with fixed interest rates. However, make sure you are open, as you may find that a lender does not meet all of your needs, but they offer other benefits that you didn’t even think of, i.e. higher loan amounts for older homeowners.
If you happen to know anyone who has released equity, it would be a good idea to speak to them and ask them about their experience, as they may be able to recommend a reliable equity release provider to you.
Please call our 24-Hour Helpline: 0330 058 1579
3. Shop around for plans
Just as it is important to shop around for lenders, we also believe shopping around for plans can help you to avoid mis-sold equity release schemes.
If you know your options, you are less likely to settle for a plan that is not right for you. You will be aware of the various benefits different plans offer, and using this information, you will be able to figure out what you want out of an equity release plan.
Exploring different plans can also help you to figure out what you want to spend your loan on, and this prevents you from selecting a plan that is incompatible with your desired spending.
For instance, you may discover that you want to get home improvements as soon as possible, and this would tell you that you need a lump sum lifetime mortgage or a drawdown lifetime mortgage, rather than an arrangement that involves monthly payments.
4. Ask the right questions
Though it is the responsibility of the lender and adviser to ensure you understand the equity release process, we would advise you to ask as many questions as you can about the scheme to ensure you know what you are getting into.
Firstly, make sure to ask questions about who the scheme is for. The adviser will be able to explain the eligibility criteria. A simplified version of this is that you must be a homeowner with a property value upwards of £70,000, and you must be 55 years old.
Finding out who equity release is targeted at will help you to consider whether it is something you would benefit from. That being said, do not dismiss the scheme just because you are not part of the main demographic, as many different types of people find equity release useful.
Secondly, ask questions about the different equity release plans that are available, and how they differ from one another. Find out the differences between a lifetime mortgage and a home reversion, and the pros and cons of each one.
Keep in mind that there are eight different types of lifetime mortgage, so you will need to ask about each one before you make a decision on the right plan for you.
Ask your adviser to explain the lump sum plan, the voluntary repayment plan, the buy to let plan, the income plan, the interest only plan, the second home plan, the enhanced plan, and the drawdown plan.
Finally, be open about your financial situation as this is something that will massively affect your experience of equity release. This includes discussing your income, your savings, any debt you are in, and whether you have an existing mortgage.
This will help your adviser to give you tailored advice, as they will be aware of how each plan would change your financial situation, as well as informing you of any dangers involved with releasing equity in your current situation.
Please call our 24-Hour Helpline: 0330 058 1579
5. Consider alternatives to equity release
If nothing about equity release is speaking to you, please do not get involved with the scheme simply because it has helped others.
Too many people have been mis-sold equity release schemes because their adviser has not covered the alternatives to equity release, and they have not done the research into this themselves.
Some examples of alternatives are: working and deferring your State Pension, borrowing from family members, remortgaging, downsizing, budgeting, and taking out a traditional mortgage.
There are of course negative aspects of each of these suggestions, so it is simply a case of analysing your personal circumstances and deciding which one would be the most helpful for you, which a professional adviser can help you with.
To demonstrate that not everyone is fit for equity release, we want to give an example of someone who we would discourage from taking out equity.
Let’s say there is a 55-year-old homeowner who is eager to retire early and use equity release to fund their retirement. Their partner is just 50 years old, so they will not be adding their partner to their plan.
They have plenty of money in their savings, but they want to capitalise on equity release to get as much money as possible to leave to their family.
The reason we would be wary about this individual taking out equity is that, firstly, they are very young, so they still have plenty of other options available to them.
At this age, they are still eligible for many different schemes, including traditional mortgages and unsecured bank loans.
Secondly, they have money in savings that they can use to fund their retirement, so they are by no means in a desperate situation that would result in needing an equity loan as soon as possible.
Another red flag is that they are not going to add their partner to their plan. This means that if they pass away before their partner (which is entirely plausible as they are five years older), their partner would not be able to continue living in their home.
Finally, they want to leave money to their family. Though this is definitely possible with equity release, if you take out equity at such a young age without repaying any of it, the interest is going to grow, and the equity release provider will take most or all of your sales proceeds to cover this debt.
This means that the individual’s family would inherit much less money than they would if the homeowner relied on their savings instead, as they would not owe a huge amount of interest if they did this.
Please call our 24-Hour Helpline: 0330 058 1579
What Can You Do If You Are a Victim Of a Mis-Sold Equity Release Scheme?
The first thing you need to do is write a letter of complaint to your equity release lender. If you are fortunate, they will respond to this graciously, and resolve the issues you have with their approach to equity release.
If the lender does not respond to you, or does not agree to resolve your complaint, you will need to contact the Financial Ombudsman Service. They will assess the situation and decide who is in the right.
The FOS will consider things such as: whether the customer was vulnerable, whether the lender followed ERC advice, whether the customer is eligible for care, how the customer spent their equity loan, whether the arrangement was clearly explained to the customer, whether the customer could have accessed money in a less expensive way, and various other things (4).
If the Financial Ombudsman Service concludes that you have been a victim of a mis-sold equity release scheme, they may ask the lender to pay compensation for any upset that the lender has caused you.
They could also request that the lender pays you an amount that restores your finances to where they were before you released equity.
Please call our 24-Hour Helpline: 0330 058 1579
How Can You Pursue Safe Equity Release?
We have highlighted that the most important thing you can do to obtain safe equity release is to find a regulated lender.
For this reason, we strongly encourage you to speak to one of our professional advisers, as they will stick to ERC advice, ensuring you will not be a victim of a mis-sold equity release scheme.
We can be reached on 0330 058 1579 between 8am-8pm from Monday to Sunday, or you can enter your details here and await a callback from a member of our team.
On the other hand, if you have already released equity and you believe you have been deceived, we will talk you through the process of making a formal complaint, as well as advising you on what your next steps could be.
Most people decide to leave the equity release scheme in the past entirely, but it is sometimes better to switch to a new equity release plan or lender that is more fitting for you and your individual circumstances.
We know that many people avoid equity release as they are scared of the scams they read about in the media. Though this is certainly something to be wary of, we want to assure you that regulated lenders will not scam you.
What’s more, the equity release scheme is becoming more flexible every single year, as new rules are introduced for lenders after each annual report.
This means that the customer really is the most important thing for regulated equity release lenders and advisers. We feel the same way, which is why we offer a free initial consultation to all of our new customers. We will book this for you over the phone when you reach out to us.
References
[1] The equity release sales and advice process: key findings https://www.fca.org.uk/publications/multi-firm-reviews/equity-release-sales-and-advice-process-key-findings
[2] Our Standards https://www.equityreleasecouncil.com/about/standards/
[3] Spring 2022 market report https://www.equityreleasecouncil.com/documents/spring-2022-market-report/
[4] Equity release https://www.financial-ombudsman.org.uk/businesses/complaints-deal/mortgages/equity-release
