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 “Early Repayment Charges” and why do they apply to my equity release plan?
An “early repayment charge” is a charge which your product provider may require if you repay some or the entire amount which you have borrowed before a date or event which is specified in your contract. For equity release plans (lifetime mortgages) there is no fixed “term” or date by which you are expected to repay your loan – it remains in place until death, or if you need to sell the property or move into long-term care. The rate of interest which you pay your provider will not change during the life of your contract. In addition, please note that your estate will not be charged an Early Repayment Charge if you move into long term care.
However, if you repay your loan early, this may have an impact on your provider’s calculations and specifically, on how much it actually costs your provider to end your contract. The lending process for your provider means they will have to work out how they are going to be able to afford to lend you the amount you need and they will have to make some assumptions about how long it will be before you or your estate repay the money borrowed. In the meantime, your provider will be paying interest on money which they have borrowed in order to be able to lend to you. If you repay earlier than expected and given that your provider has already entered a lending agreement themselves to be able to lend to you, then they will have to secure the interest to ‘cover’ for the remaining time that they had assumed your loan would last and for which they have paid interest. This is why providers usually require you to pay an “early repayment charge”.
Before you commit yourself to taking out a lifetime mortgage, you will be given a “lifetime mortgage Illustration.” Section 13 of that illustration is headed “what happens if you do not want this mortgage anymore?” It explains whether an early repayment charge may apply to your plan and, if so, the basis on which the charge is calculated. It must also show the maximum amount (in cash) that you could be liable to pay.
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).