Published On: Fri, Jun 26th, 2020

Mortgage: Equity release problems identified by FCA – should you use them? | Personal Finance | Finance

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Mortgage holders have a number of options available to them for what they can do with their properties. One of the more substantial actions that can be made is to utilise equity release.

Equity release generally refers to a range of products that a homeowner can use to access cash ties up in their home, so long as they’re older than 55.

The money taken can be released as a lump sum or paid out in smaller increments.

As it stands, there are two options for equity release:

Lifetime mortgage

Here, a person can take out a mortgage secured on an existing property provided it is a main residence, while still retaining ownership.

READ MORE: Mortgage applicants denied despite having a mortgage in principal

The Money Advice Service details that a person can choose to “ring-fence” some of the value of the property as an inheritance for their family.

They can then choose to make repayments or let the interest roll-up, the loan amount and any accrued interest will be paid back when the holder dies or moves into long-term care.

Home reversion

Home reversion involves the selling of part or all of the home to a reversion provider in return for payments.

The homeowner will still have the right to continue living in the property until they die but they must maintain the building upkeep.

Just like the lifetime mortgage option, users of home reversion can ring-fence a percentage of the property for later inheritance usages.

At the end of the plan, the property is sold and the proceeds will be shared according to the remaining proportions of ownership.

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Equity release can be a complicated and/or expensive endeavour and as such, homeowners are encouraged to seek out advice from specialist advisors.

This should make the process much smoother but in a multi-firm review conducted by the FCA, worrying practices were found.

In “The equity release sales and advice process” publication released last week, the FCA highlighted a few areas of concern.

As quoted from their findings: “Our findings were mixed. We saw cases where lifetime mortgages were working well, unlocking equity for consumers who would not have been able to afford traditional mortgages or other sources of borrowing.

“However, we also saw cases where it was not clear that the advice was in the best interests of the consumer.”

They went on to identify the main areas that need to change: “We found three significant areas of concern about the suitability of advice provided, which we consider increases the risk of harm to consumers in this market:

  • “Insufficient personalisation of advice
  • “Insufficient challenging of customer assumptions
  • “Lack of evidence to support the suitability of advice”

Specifically, the regulator noted the following, non-exhaustive, list of poor examples:

  • Advisors not sufficiently accounting for different financial circumstances of customers. This included examination of those in their 50s who were still working as opposed to those who were retired and on a fixed income and the impacts this would have on their options
  • Debt consolidation impacts not being explored fully
  • Customers financial circumstances not being given proper analysis from an advisor

The FCA concluded by detailing what actions firms need to do to rectify these issues but they also provided the following guidance for mortgage holders and potential customers: “You should think of equity release as a long-term transaction (it can be expensive if you change your mind).

“Consider whether it will be right for you both now and in the future, as well as how much it will ultimately cost.

“If anything is unclear check with the adviser or independent sources, such as the Money and Pensions Service.

“If you are unhappy with the advice you have been given or the way your transaction has been handled, you should contact the adviser or their firm first to follow their complaints procedure. If you’re not happy with the response you get from them, then you may be able to ask the Financial Ombudsman Service to get involved.”

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