From Daily Telegraph.....5th January 2006
Equity release is a high-risk option of the last resort, elderly warned
By Rosie Murray-West
Unlocking value from your home may be a perilous and expensive business, it was claimed yesterday.
Which?, the consumer affairs group, said that equity release schemes, which are commonly used by retired people who want to stay in their home but release some of the capital from it, should be entered into only as a last resort.
It said that people should think "long and hard before committing to one of these high risk products".
The group particularly criticised the equity release scheme provider Norwich Union over an advertisement that suggested using the money for a trip to New York or "something for the family".
"They're a very expensive way of paying for such luxuries," the report said. "We think it is irresponsible to advertise such schemes like this."
The group said that if the owner of a property worth £350,000 borrowed £80,000 using a typical equity release scheme it could end up costing them more than £256,000 after 20 years or £343,350 after 25 years.
Which? advised those who wished to take out an equity release scheme to consider a number of alternatives, including downsizing - even though it concluded that this may be "difficult emotionally".
It also suggested borrowing from family and friends on an informal basis, or looking for local authority grants to help with essential property repairs and home improvements, and even checking eligibility for state benefits.
"Equity release schemes should come with a warning: they are very expensive and can leave you with little or no equity in your property if you keep one for 20 to 25 years," Which? said.
However, a spokesman for Ship (Safe Home Income Plans) said that all of its members asked people to get advice before committing to a plan. Ship members, including Norwich Union, pledge to protect planholders and those applying for equity release schemes.
He said that the money drawn down from schemes was "increasingly being used for lifestyle purchases" rather than necessities, and added that he was fully supportive of the schemes being advertised on television.
"If we don't advertise equity release how are people going to know about it?" he asked.
Norwich Union's head of equity release marketing, Darren Carter, said that the Which? report "doesn't present the whole picture". He said that people did not always want to move house, and used the schemes to gain some money while
staying put. "A lot of this is about life-enhancement. These people have a very large, valuable asset and they want to use it."
The Which? report looked at a variety of equity release schemes including fixed repayment mortgages, where you release a lump sum from your home and the amount you owe is fixed and repaid when the house is sold. It concluded that these loans were more reasonable over the long term.
Roll-up mortgages, a more common form of equity release, proved more expensive over the long term. These come in two forms, one under which you take out a lump sum at the beginning and the interest is compounded and added to the loan, but you do not repay it until the home is sold.
The other option is a drawdown where you take your loan in smaller amounts and only pay interest on what you owe. This proved the most expensive form of equity release.
The final option, a home reversion scheme, where you sell a proportion of your home to a company, is not yet regulated. Which? advised people to avoid this completely.
THE FINANCIAL SERVICES AUTHORITY LONDON
24 May 2005
The Financial Services Authority (FSA) has warned advisers it must address the regulator's serious concerns about the suitability of advice being given to consumers on equity release schemes and follow-on investments after it completed initial work into this area. The FSA has not ruled out the use of its enforcement powers following the results of this work.
The FSA had identified lifetime mortgages as a priority ahead of becoming responsible for mortgage regulation on 31 October last year, and carried out an exercise involving 42 mystery shops – including product providers, Independent Financial Advisers and mortgage brokers – to assess advice standards within the lifetime mortgage market. A second piece of work, involving visits to firms and desk-based research, looked closely at subsequent investment advice provided to customers of seven firms that are active in this market.
The results of mystery shopping revealed that more than 70 per cent1 of advisers in these firms did not gather enough relevant information about their customers to assess their suitability for the product, and more than 60 per cent of the mystery shoppers reported that their adviser had not explained the downsides of equity release.
The FSA is also concerned about the findings of the review of subsequent investment advice where, in all of the seven firms looked at, advisers failed to explain the link between this type of borrowing and subsequent investments. The FSA is concerned that advisers are recommending consumers to borrow to invest without properly explaining the implications of this. The investment advice given fits into three key areas:
- Investing for growth: the FSA identified that, in some firms, advisers are encouraging customers to release more than they require and reinvest the surplus cash in products such as investment bonds.
- Investing for income: There are equity release products on the market that allow the consumer to draw down an income from their lifetime mortgage. Instead of recommending this route, advisers are recommending that consumers release a lump sum and reinvest it in, for example, an investment bond and take 5% withdrawals to provide a regular income stream. As well as being more expensive for the consumer, reinvesting capital in equity-backed investments unnecessarily exposes the consumer to risk2.
- Inheritance tax (IHT) mitigation: Using equity release for IHT mitigation is a very finely balanced arrangement. A number of the cases the FSA reviewed were likely to leave the customer's estate worse off than if they had not taken any action to mitigate their IHT liability.
In many cases reviewed, customers were zero-rate tax payers and did not have any existing investments, and the FSA is not satisfied that recommending a complicated strategy was suitable for these consumers.
Clive Briault, Managing Director of Retail Markets at the FSA, said:
"Our work has found another disappointing instance of many advisers giving poor quality advice. For example, some people releasing equity from their homes are being advised to borrow more than they need, and to invest these additional funds, which can be a high risk strategy. What makes matters worse is that these consumers tend to be elderly and vulnerable people who can ill-afford to be unnecessarily exposed to risk.
It is extremely important that advisers ensure that anyone considering releasing equity from their property understands what is involved and can make a decision that suits their circumstances.
We will be carrying out further work in this area and we expect senior management to ensure that their advisers are giving appropriate advice, and to deal with any concerns that we identify. It is our aim to help retail consumers to achieve a fair deal, and the financial advice market should provide good quality, suitable advice to consumers."
The FSA will distribute 120,000 leaflets entitled 'Thinking of raising money from your home?' to GP surgeries, libraries, Citizens Advice Bureaux, and other not-for-profit agencies across the UK. A free factsheet providing more detail for consumers is also available by calling the FSA leaflet line on 0845 456 1555 or by visiting the Costa Del Sol Action Group web pages.