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Mis-Sold Equity Release Schemes – What you Should Know

Mis-sold Equity Release Schemes

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What classifies as mis-sold equity release schemes? In this equity release mortgage guide, we quickly recap on equity release mortgages and schemes before diving into the topic of mis-sold equity release. 

If you believe you were wrongfully talked into equity release and mis-sold a plan, we’ll even explain what you can do about it. 

What is equity release?

Equity release is an overarching term that refers to ways for senior homeowners to access some of their home equity as either a tax-free cash lump sum or drawdown. It shouldn’t be confused with borrowing against equity using a second charge mortgage. This money is used to make retirement financially secure. 

To be eligible for an equity release plan, you must own a home with a minimum value of around £70,000. You must also meet the lender’s minimum age requirement, which will be set somewhere between 55 and 65. If you apply as a couple and joint homeowners, the youngest person must meet this age requirement. 

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How does equity release work?

Equity release schemes work by providing the homeowner with some of their home equity and they do not have to make monthly repayments. 

The money taken out will be repaid when the home is eventually sold, which only usually happens if the (last surviving) homeowner moves into long-term care or after they pass away. In the latter situation, the debt is repaid from the sale proceeds within the deceased’s estate. 

Lifetime equity release mortgage

A lifetime mortgage – also known as an equity release mortgage – is a loan to take out some of your home equity, usually capped at around 60% of your equity. It is the most common method of equity release. 

This money is charged with a fixed interest rate that rolls up, meaning you don’t pay the interest back either and it just adds to the total of the debt. Some people prefer to make voluntary interest repayments to reduce the total owed when allowed. 

For example, you might decide to take out £65,000 of equity as a lump sum and agree to a 6.4% interest rate. If you choose not to make interest repayments, the amount owed after 12 years would be a little short of £137,000. 

There’s also an enhanced equity release mortgage designed to help people with a shorter life expectancy access more home equity than standard. This money is often used to pay for private healthcare services. To qualify, you’ll need to submit a health questionnaire and possibly medical records. No medicals are required. 

Home reversion scheme

A home reversion plan does not charge any interest. However, the homeowner must agree to give up a greater percentage of the property’s future sale proceeds. 

For example, you may decide to take out 30% equity of a £150,000 home (£45,000) but have to pay back 80% of the property’s sale value in the future. If your property value increased by 10% by the time the debt was paid, a total of £132,000 would be owed. 

Is equity release a con?

Equity release mortgages and home reversion plans are not a con as long as you choose a lender that is authorised and regulated by the Financial Conduct Authority. You should also opt for a provider that is a member of the Equity Release Council – which we will dive into next. 

Some have the perception that equity release is a con because it can be so expensive over the long haul, and significantly decrease the value of someone’s estate they pass on to family. Although this can be true, it makes it expensive rather than a con. 

The Equity Release Council

The Equity Release Council is a group that invites any company working in the equity release sector to become a member. This includes equity release plan providers as well as financial advice companies or even law firms. All members must be legitimate by being authorised and regulated by the Financial Conduct Authority. 

When a company agrees to become a member, they commit to the rules and guidelines set down by the council. These rules are implemented to protect homeowners taking out lifetime mortgages by offering them increased protection and assurances. 

Some of the benefits offered by choosing an Equity Release Council member are listed below. 

The pros of an equity release mortgage

There are many advantages of using an equity release mortgage or another plan, such as:

  1. The money you receive is not subject to income tax or CGT because it is a loan
  2. The money can be spent on anything you wish, from private care to cruises and more
  3. You do not pay rent or monthly payments on the loan or any interest
  4. You only repay when you either die or move into long term care
  5. You can never be forced out of your home for normal reasons (ERC rules)
  6. You can never owe more than what your home is worth through the negative equity guarantee (ERC rule)
  7. You can protect some of your home’s value for beneficiaries 

The cons of an equity release mortgage

The overriding con of equity release is how expensive it can be, although this is a downside more than a con per se. As illustrated in our brief examples earlier, both an equity release mortgage or home reversion plan can more than double your debt.

This has an impact on your estate in the future and how much you will pass on to your beneficiaries. And that is why choosing an equity release mortgage is often more difficult if you have beneficiaries who would significantly benefit from any inheritance they receive from you.

What are the pitfalls of equity release?

The biggest pitfall of equity release is not taking the time to understand what’s involved, which includes getting appropriate independent financial advice. It’s best to use an adviser that specialises in equity release rather than generic financial advice. If you’re choosing an equity release mortgage, it’s best to stick with lenders that are part of the Equity Release Council. 

Another potential pitfall is not being open with your adviser during the consultation. You should reveal all your plans in the future so they can get the right agreement for you. For example, not telling them about plans to downsize could trigger some early repayment costs and be an expensive mistake. 

Can equity release be mis-sold?

Mis-selling is a problem across the financial industry, and the equity release niche is not exempt. 

Although equity release companies have largely cleaned up their act – with help from the Equity Release Council – there are still instances where a lifetime mortgage or home reversion plan is mis-sold. 

Signs of equity release miss-selling

Some of the common signs of being mis-sold an equity release mortgage or scheme are:

  1. Interest charges not being fully explained
  2. Early repayment costs and other loan fees not explained properly 
  3. Inheritance tax implications not discussed
  4. Alternative options not explored or pointed out
  5. The wrong plan recommended 

Another big one is being told to remove a homeowner from the property ownership to meet the age requirements. This is dangerous for the younger homeowner if their partner passes away first. 

An example of equity release miss-selling

An example of equity release being mis-sold would be a client speaking with a financial adviser about the possibility of releasing equity to help their son buy a home. Despite having £130,000 in savings, the adviser suggests that the client releases £60,000 instead, and without truly explaining the total cost this would bear over time. 

The adviser should have been recommending that they use some of their savings instead, and they should be fully explaining the total costs of equity release. 

What to do about mis-sold equity release schemes

You can claim compensation against mis-sold equity release schemes. The compensation received by successful claimants should put them into the financial position they would have held if they were given the correct advice in the beginning. This includes all fees and can even include financial compensation for the distress caused. 

How do I complain about mis-sold equity release?

The first step to complain about mis-sold equity release is to write a formal complaint letter to the lender. If they do not agree with your assessment, the complaint can be escalated to the Financial Ombudsman Service. 

The Financial Ombudsman Service is a body set up to deal with disputes like these and they will look at both sides to make a decision on whether compensation should be awarded or not. 

What if my lender went bust?

If your lender has gone out of business, you might still be able to claim compensation. You should direct your complaint to the Financial Services Compensation Scheme (FSCS)

Can you sell a house that has equity release?

If you have taken out an equity release mortgage or home reversion plan, it’s still possible to sell your home and move or downsize. The Equity Release Council insists that any homeowner who wants to move to a suitable alternative property should be allowed to do so. 

For the new property to be suitable, it should be of equal or higher value and just as easy for the lender to sell on the open market in the future. For example, moving into an extremely remote area may cause issues because the lender may feel they will not be able to sell the property easily. 

It gets a little more complex if you want to downsize to a less valuable home. You may need to pay off some of your equity release scheme in the process, which can trigger early repayment fees. However, including a downsizing clause in your original agreement can help you avoid early repayment charges when downsizing. 

More free help understanding equity release

MoneyNerd has been busting myths and providing simple explanations on everything to do with equity release in the UK. Read one of our other guides on equity release today to learn more. We’ve covered equity release mortgages from all angles, so our readers are completely in the know.