Tim Leonard
Equity release is always – and rightfully – labelled a “big decision”, so it’s only natural to wonder whether equity release is safe. As with most financial products, there are risks associated with equity release, which you must take into account. But the good news is that there are safeguards in place to protect equity release customers. Importantly, equity release lenders want you to trust them too.
How safe is equity release?
Three core elements come together to underpin the safety of equity release: formal regulation, the need to take advice and appoint a solicitor, and the minimum standards set for providers and advisers, who are members of the Equity Release Council.
Financial Conduct Authority regulation
As equity release is formally regulated by the Financial Conduct Authority (FCA), this should provide peace of mind. Any firm offering lifetime mortgages or home reversion plans is overseen by the regulator, as are equity release advisers.
As a result, they must adhere to standards set by the FCA, and have straightforward procedures to allow customers to make complaints and register claims for compensation if they believe they are entitled to.
Equity release firms that are regulated, and so must meet this criteria, will be listed on the FCA register.
Obligation to take equity release advice
You will only be allowed to take out an equity release product if you have received advice from a qualified equity release adviser. This is to make sure that equity release itself, and any product you are taking out, suits your needs.
Providers might have their own advisers you can talk to or you may want to find an independent financial adviser yourself. However, whoever you use must have the appropriate professional qualifications.
These include, but are not limited to, the following:
- Certificate in Regulated Equity Release (CeRER) from the Institute of Financial Services
- Certificate in Equity Release (CER) from the Chartered Insurance Institute
- Equity Release Mortgage Advice & Practice Certificate (ERMAPC) from the Chartered Institute of Bankers in Scotland.
If you use an adviser who is a member of the Equity Release Council, you can be sure they are suitably qualified. They will also need to adhere to the more stringent standards and rules set by the trade body.
Taking advice from an FCA-registered adviser also guarantees you the right for recourse through the Financial Ombudsman Service should the need arise.
A final requirement if you’re taking equity release is to appoint a solicitor and take independent legal advice to ensure you fully understand what you are signing up to.
» MORE: All about mortgage advice
The Equity Release Council
The Equity Release Council is a trade body that equity release professionals can join if their products or advice meet certain criteria set to ensure equity release customers receive the best possible service. Therefore making sure any provider or adviser you use is a member of the Equity Release Council will mean you are benefiting from the strictest equity release safeguards. You can check this on the Equity Release Council’s member register.
A provider can only tell customers a product meets Equity Release Council standards if it offers the following benefits:
- The right to remain in your home– this guarantees that as long as your home remains your primary residence, and you meet your contractual obligations, you have the right to live in that home until you die or enter long-term care.
- The option to move – this ensures you are allowed to move to a new property, as long as it can be used as security for your loan.
- A no negative equity guarantee – this guarantees that when your home is sold, if the amount raised is not enough to cover your loan repayment, neither you nor your family or beneficiaries will be liable for making up the difference.
- Fixed or capped interest – lifetime mortgage products must either have a fixed interest rate or, if the rate is variable, a cap must be in place for the duration of the loan.
Advisers who are members of the Equity Release Council must follow its statement of principles. These include putting the best interests of customers first, delivering “fairly priced” products and services that best suit their customers’ needs, and making sure customers understand their rights and responsibilities if they make use of equity release.
What are the potential pitfalls of equity release?
Such safeguards can provide valuable peace of mind that a product should only be provided once it is considered by a professional, to suit your personal circumstances. They are also responsible for making sure you fully understand the long term impact an equity release product can have on your future finances. The long term impact is where the main risk lies with equity release. The risks include:
Debt can accrue fast
Equity release interest rates are generally much higher than on traditional mortgages, and your debt can quickly grow. If you opt for a lifetime mortgage, where interest is normally rolled up rather than making repayments during your lifetime, you will also be paying interest on the interest that is unpaid. The snowball effect this creates means your debt will grow even faster.
Likelihood of leaving a smaller inheritance
The likely result of fast-growing debt, and the need to pay this back from the eventual sale of your property, is that you’ll have less, or perhaps even nothing, to pass on as an inheritance when you die. For this reason, it is always important to talk to your family if you are considering equity release and to include them in the decision-making process, as this may affect any inheritance they may have been expecting.
Potential impact on state benefits
If you start to receive money using equity release, this could affect your eligibility for certain means-tested state benefits, such as pension credit, for example, that you have previously received based on you having a lower income.
High early repayment charges
If you are considering repaying some of what you owe on your equity release plan before you die or move into care, be aware that significant early repayment charges will often be applied.
Is equity release a safe option?
Ultimately equity release can be considered a safe way to access the value tied up in your home because it is regulated by FCA and there are strict requirements over taking advice. The standards set by the Equity Release Council ensure products offered by its members include valuable safeguards for customers too.
However, the potential drawbacks mean equity release should never be entered into lightly. Make sure you understand the advice you receive, and take the time to talk your options through with your adviser and your family, including looking at alternatives to equity release such as remortgaging or downsizing to a smaller property.
If equity release is suitable given your circumstances, and you’re comfortable with the potential long-term implications, it is still essential to consider the various products on the market and find a plan that suits your needs.
Image source: Getty Images
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