Implications and risks
Can equity release be a target for fraudsters?
As with any matter involving large sums of money there is a potential risk of fraud. With equity release, it is not so much lenders as borrowers who may be at risk – and this means that advisers and providers may need to ask different sorts of questions in order to protect their customers and their investment
Fraudulent activity can take many forms: here are some examples which you as a consumer should be mindful of:
- Coercion: an unscrupulous person – who, sadly, may be a trusted friend or even a family member – may see an opportunity to get some money for themselves by persuading someone with an equity release plan to release funds and give the money to them.
- Fraudulent application: may be made by someone close to a customer – a friend, family member or possibly even a carer – by forging application papers and signatures.
- “Romance” scams: where the customer is contacted by someone who appears very attractive to them – both physically and in terms of their compatibility. The fraudsters will send photos and clever messages and will quickly develop a relationship with their victims, in many cases promising companionship and love. They will then play on their victim’s belief in their existence and generosity –and start asking for money. In most cases – they don’t exist at all.
- Investment scams: where the fraudsters target people who they know own their own properties and may therefore be persuaded to borrow money from any source including an equity release plan – and then “invest” the cash released in an investment “plan” proposed by the fraudster, who will promise excellent returns on the investment. Needless to say, the fraudster generally disappears with the cash, never to be seen again. The general rule with this type of scam is that if it sounds too good to be true – it almost certainly is. Our rules specifically require equity release advisers to explain to customers that it is inadvisable that the funds released are reinvested in any medium or long-term investments.
Our members work hard to reduce the risk that a customer may be being targeted fraudulently. Advisers need to understand their customers’ needs, objectives and future plans when advising them on a suitable equity release product – and if they think something doesn’t stack up – and that the customer may be at risk – they will ask more questions.
We also require all customers to be given independent legal advice when they are about to enter into their equity release contract. A solicitor will meet the customer face-to-face – and verify that the customer understands what they are being asked to sign up to and that there are no obvious signs of them being put under pressure by someone else.
What happens if a regulated company goes into liquidation and we have a lifetime mortgage with them?
Equity release products are among the most highly regulated financial services products in the UK. As well as formal regulation that is overseen by Government, Equity Release Council members also follow a strict set of consumer-focused industry standards, established in 1991, to ensure a safe and reliable market.
Regulations require firms to have sufficient resources to withstand significant economic shocks only expected once in 200 years, so it is highly unlikely a firm would fail. If a firm exited the market, steps would be taken to protect its existing customers’ interests. There have been examples where companies have stopped writing new business or left the market and another provider or third party has assumed responsibility for its customers. Alternatively a firm may cease to provide new lending but continue to provide services to its existing customers.
There can be no change to a regulated contract’s guaranteed terms as a result, including the interest rate customers signed up to. For Equity Release Council members, this includes safeguards such as the No Negative Equity Guarantee, a fixed or capped interest rate for life and the right to remain in the property for life or until they need to move into long-term care.
Any elements of a contract that are not guaranteed which can include additional borrowing do not have to transfer to a new lender as some firms in these situations may not provide additional lending facilities. While any existing customer can seek advice about the option to re-mortgage to another product or provider, in circumstances such as a firm going into liquidation there have been examples when existing mortgage loan books have been sold to new providers and customers have had any early repayment charges (ERCs) waived to help them move.
What are fixed and gilt linked early repayment charges?
Most lifetime mortgage borrowers will never have to pay an early repayment charge (ERC). However, ERCs might be imposed by provider if a borrower wants to make repayments above the agreed limits or before a lifetime mortgage has run its full course. ERCs are there to cover the losses the provider may incur when a borrower repays sooner than was expected and there are two different types.
The first type, fixed (or defined) amount ERCs, are fixed but they can taper. For example, a provider might charge a penalty of 10% in year one, 9% in year two, 8% in year three and so on. Each provider has its own variation of this sliding scale, but borrowers will always know the fixed penalty up front.
The second type, variable ERCs, can seem complicated, but they are quite straightforward and are based on the value of something called a gilt. Gilts are government bonds often favoured by investors making long term investments, such as equity release providers.
If gilt yields rise in the time between the borrower taking out equity release and when they try to repay early, no ERC will be due. But if they have fallen, the provider will impose an ERC relative to the fall in value.
Gilt linked ERCs typically are capped at 25% of the amount borrowed and there are some instances when neither a fixed nor gilt-linked ERC will apply, such a compassionate window.
The Equity Release Council has produced two consumer factsheets which are available at the following links early repayment charges explained and calculating early repayment charges. Borrowers should always seek guidance from an adviser.
What happens if I want to repay the loan early?
If you repay a Lifetime Mortgage early you may have to pay an Early Repayment Charge. These charges can be quite expensive – but before you took your plan out you will have been given information about the maximum you might have to pay in the event that you decided to repay some or your entire loan early.
Most equity release plans are intended to be long-term options. You should make sure that you tell your adviser when you take out your plan if you think there might be circumstances in which you might want to repay your loan early. The products available vary – some have no early repayment charges, some apply the charge to a specific number of years after the plan was taken out, and others apply the charge throughout the life of the plan. You will need to take into account the cost of the plan you are considering along with the possible cost of an Early Repayment Charge – your adviser will help you decide which option is best for you, given your circumstances.
If you have a Home Reversion Plan and want to pay off the loan early, you may have to sell your share of the property to pay off the outstanding amount which you owe your provider. You may find that this leaves you with too little money to buy another property. However, the Equity Release Council’s rules require members to allow customers to move to a suitable alternative property, so if you are able to find another suitable and affordable property, this might be the best option for you.
If I take out an equity release scheme, do I risk losing my house?
No. The amount of money you borrow against the value of your home, plus any rolled-up interest, can never go above the value of the property – when it is sold at the end of your plan – due to the No Negative Equity Guarantee safeguard upheld by Equity Release Council members. You will continue benefitting from the rises in property value in the years to come.
With a lifetime mortgage, you will continue owning your home and with a home reversion plan, you would have to convey the deeds to the scheme provider – totally or up to an agreed percentage. Based on that, the scheme provider will own this part of your property. However, in both cases you will own a lifetime lease guaranteeing you the right to stay in your home until death or when you move into long-term care.
The main risk for borrowers who have traditional mortgages is that they find themselves unable to make their regular repayments – and if they get too far into debt the lender may decide to go to court to get an order to repossess the property. The lender will then sell the property to recoup as much as possible of the money which it had lent to the borrower. With most equity release schemes however, you the borrower are not required to make any regular repayments to the lender, so the question of not being able to afford to repay the loan simply does not apply.
It is rare for a lender to take possession under an equity release plan but as with every contract, failing to comply with the terms and conditions of an equity release plan, could mean that the house might be repossessed. For example, failing to keep the property in a good state of repair, and renting it out/ subletting a part of it are reasons why a contract could be considered breached on behalf of a borrower. We should emphasise that even if a contract is breached on the behalf of a customer, a lender would first give the borrower warning about what the borrower needed to put right.
It is true that instances of repossessions under equity release schemes have happened in previous decades when the product was unregulated. Nowadays, equity release is one of the most regulated financial products in the UK and both the regulator and the industry itself work to ensure, as much as possible, that there are no negative customer experiences. The industry aims to protect the good work that has taken place since then with regards to standards and its long-term reputation. In fact, the Equity Release Council is an organisation created exactly on this premise: to ensure your total peace of mind through their safety guarantees (please see FAQ on product standards).