Equity release mortgages are steadily becoming one of the most popular ways to unlock cash for retirement. According to the Equity Release Council, consumers released £1.81bn from their homes in the second half of 2019 – 44,000 borrowers in total.
However, while many of these people were happy with their decision, others were left out of pocket. A recent FCA report found that it was not always “clear that the advice was in the best interests of the consumer”, suggesting that several people had been miss-sold to.
But what exactly are the major issues with equity release mortgages, and why are the numbers of complaints rising? Here’s an examination into the root of the issue.
What are the two key issues with equity release mortgages?
There are several problems relating to equity release mortgages, and many are linked to the manner in which they are sold. However, some of the biggest pitfalls are actually tied to the mortgage provider, not the advisor.
Failure to account for a longer life
Equity release is an increasingly attractive option for older consumers, and as such, the market is becoming more competitive. In a bid to win customers, lenders are offering appealing loan-to-value ratios, while failing to take into account the fact that the consumer may live far longer than anticipated.
This is a big issue for lenders and customers alike. The interest accumulates over time, and that means that the longer it has to increase, the higher the total amount to be repaid. Borrowers may be unable to repay the final debt, and lenders may struggle if it takes longer than expected to collect loan repayments.
Undervaluing house prices
A lot of lenders have been basing their loan-to-value ratios on elevated house-price values. While it’s true that property values tend to rise over time, it’s not always the case, and it can’t be guaranteed. If the value of the house drops instead of rising, this has serious implications for the repayment of the debt – again, both for the lender and the borrower.
What is the impact on the customer?
These are two fairly major underlying issues. Of course, they don’t apply to all lenders – many reliable mortgage providers have calculated both longer life and house-value scenarios into their products; protecting themselves and their customers. However, for those that have failed to accommodate these potential issues, it can result in significant problems.
If the mortgage has an NNEG (negative equity guarantee), this protects the borrower to an extent. It’s worthwhile checking that a NNEG is in place before committing to an equity release mortgage. But if an NNEG isn’t included, this means that the consumer could owe considerably more in compounded interest than they’d bargained for.
In instances where the original borrower passes away (or goes into residential care), this debt effectively passes to their next of kin. They may have expected to inherit a certain amount from the sale of the property, and now won’t, as a result of the equity release mortgage debt.
Are these the only issues to be wary of?
These two pitfalls are certainly something to be aware of when selecting an equity release mortgage. However, there are other potential problems to look out for too, such as:
- Hidden fees. Several complaints made to the FOS relate to early repayment fees and set-up fees. Sometimes, the financial advisor fails to mention them, which counts as mis-selling.
- Lack of information about compounded interest. Many consumers were unaware of how much interest they’d owe at the end of the mortgage term.
- No information about risk. No loan is ever entirely risk-free, and the customer has a right to know what the risks are. Attitude to risk should also be assessed before any commitment is made.
Conflicted interest – benefits vs equity release
Another issue that consumers often aren’t aware of is the impact of an equity release mortgage on benefits entitlements. For example, having access to such a large lump sum of money could mean that you’ll no longer be able to claim Jobseeker’s Allowance, Income Support, Universal Credit, Pension Credit, Employment and Support Allowance, or Council Tax Support. All of these are means-tested, and your equity released cash will be factored into your eligibility assessment.
Ultimately, it’s a financial advisor’s job to ensure that you understand all aspects of the equity release mortgage; not just how much money you can unlock, but how much you’ll owe, and whether or not it’s the best option for you. Failure to do so is regarded as mis-selling; as many consumers are already finding out.