Equity release is something of a growing market and many older people are attracted by the idea of releasing equity from their home to give them a substantial sum of money, whilst also not being required to make any repayments.
However, given the numbers of people wanting to take out this form of mortgage, the Financial Conduct Authority has been monitoring the advice standards of firms active in this area. The regulator says it has five principal areas of concern:
- Firms’ cases files not evidencing that equity release is suitable for the customer, for example, traditional mortgages may be more suitable in some cases
- Firms not doing more to challenge customers over what may be inadvisable reasons to release equity. Consumers may contact advisers assuming that a lifetime mortgage is a right solution for them, but advisers must still ensure that this really is the case
- Firms failing to take into account all appropriate customer circumstances when giving advice
- Firms failing to fully explain to customers the costs of compounding interest over a long period of time. This means that equity release can be an expensive way to meet a short-term borrowing need. It also means that customers who have the means to pay a fee upfront should do so, with the FCA commenting on one case where the fee effectively increased by a factor of 25 after the interest on the fee accumulated over a long period
- Firms not making it clear just how significant the costs of exiting an equity release contract can be. Some customers may seek to do this if their financial circumstances change at a later date, such as if they wished to downsize to a new property
The FCA notes that older customers are often also vulnerable customers, and so it is vital that firms treat equity release customers fairly. An equity release contract is a lifetime product, so any advice firms give will have an impact on the customer’s finances throughout the rest of their life.
In certain circumstances, equity release can be appropriate as a method of consolidating debts. However, where customers have surplus income that they could use to repay their debts, this may be preferable to consolidating via an equity release plan where a significant amount of interest might accumulate prior to the end of the term. The FCA says that too many firms are assuming consolidation is always an appropriate course of action.
The FCA’s Executive Director of Supervision, Retail and Authorisations, Jonathan Davidson, said:
“Deciding to enter into a lifetime mortgage is a big decision with a big financial impact for consumers. In many instances it makes sense but whether it does or not depends on personal circumstances and how they might change.
“It is therefore critical that advice offered to consumers looking at lifetime mortgages is suitable for their personal circumstances. It is clear from our review that advice being offered to such consumers, including some vulnerable consumers, is still not up to scratch.
“All firms offering these products should read our review and take action to make sure consumers are receiving advice tailored to their personal circumstances.
“We’ve continued to engage with firms where we had concerns and, as part of our ongoing supervision of Mortgage Intermediaries, we will be carrying out more detailed follow-up work into the suitability of advice in the lifetime mortgage market.
“If in doubt as to whether a lifetime mortgage makes sense for you as a consumer, you should explore your personal circumstance fully with your advisers or with independent sources such as the Money and Pensions Service.”
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware of the facts, circumstances or legal position may change after publication of the article.