Is equity release still a dirty word?

With the industry widely predicting a surge in older people tapping into property wealth to fund their retirement, equity release critics are increasingly turning to the media to tell tales of unsuspecting consumers who have been ‘conned’ out of their life savings by unscrupulous lenders and ‘hidden’ compound interest charges.

A Daily Mail article this week told the tale of a couple who “fell foul of equity release loan trap”, detailing how the £42,900 they had originally borrowed had “ballooned to £119,391 since 2003 because of the crippling effect of compound interest charges”.

Yet the case was not upheld by the Financial Ombudsman Service, and Aviva counter argued that “the correct process was followed when the product was sold, and that we took steps to make sure all potential financial consequences of the product were explained.”

Industry experts are now urging advisers not to be deterred from offering equity release due to ‘misleading reports’ that are causing confusion as to how early redemption charges can be incurred and how interest is applied.

Speaking to Financial Reporter, Nigel Waterson, Chairman of the Equity Release Council, urged advisers not to be put off by critical press stories. He said:

“The reality is, first of all is equity release is a very safe, well regulated product. Secondly it's growing very fast in terms of popularity. There's a lot of potential in this market and increasingly, their older clients are going to want advice on how to deploy their housing wealth for a comfortable retirement. The average plan for equity release is nearly £80,000 so for a lot of people their housing wealth must be part of the equation for a comfortable, stress free retirement.

“There are a lot of good advisers already in the equity release sector but there are still thousands of IFAs out there who have got the equity release qualification but don't practice equity release and they're the kind of people we'd like to encourage to get into this sector on an active basis.”

In his speech, Christopher Woolard questioned whether the “reputation of the market has reduced the number of firms and consumers willing to engage in it”.

However the equity release industry is lending at record amounts, and the sector has seen further growth with the arrival of Legal & General on the scene this year.

The Equity Release Council remains critical of stories surrounding ‘ripped off consumers’, highlighting that all equity release sales are reviewed by a solicitor of the customer’s choice, who signs a certificate to confirm the rights and obligations of both parties (the customer and the product provider) have been explained and that the customer wishes to go ahead. The certificate also confirms that the solicitor is acting independently of the product provider and the financial adviser. The client is required to sign the certificate, along with the solicitor to confirm their understanding and agreement.

In addition to their regulatory responsibilities, adviser members of The Council are required to fully discuss alternatives to equity release, advise the customer to speak to their family and any other material beneficiaries of their Will, and to consult an independent legal adviser. Customers also receive a ‘no negative equity’ guarantee so they will never owe more than the value of their homes or leave any debt behind – regardless of changing property prices.

Finally, advisers must fully explain all fees and risks associated with the product recommended, for example: the impact of any compound interest and any early repayment charges.

Despite this, many media reports have implied that early repayment charges are incurred whenever people want to move, but the Equity Release Council have hit back at “misleading” reports about ERCs and interest fees on equity release products.

Nigel Waterson said:

"There is no question of hidden costs. There's a process whereby people are taken through all the details - given a Key Facts Illustration document which sets out how much the debt is going to be in a year, or five years, or ten years. So for people to say it came as a huge surprise is somewhat unconvincing.”

The Council also confirmed that customers can move a loan to a different property without incurring an ERC, stating:

“If a customer is looking to downsize, they can ‘port’ their loan to a suitable property without incurring a charge. Even if some of the loan must be repaid because their new property is of a lower value, there will be no ERC unless they want to repay more than they are required to. If a customer wants to do so, the ERC will only apply to the extra amount above the required repayment.”

With regards to compound interest, the Council stressed that it is “seen as a fair method to charge for a loan where the customer does not make repayments until the loan ends”. This is because the true cost of borrowing is higher, as the provider cannot use repayments to generate interest as they do with other financial products.

The Council added:

“The alternative to compound interest – a flat annual fee – would result in a much higher rate for equity release borrowers to reflect the true cost of borrowing. Some recent equity release plans allow monthly repayments before switching to roll-up at the choice of the customer: where monthly repayments are made, simple interest is used instead of compound interest.

“The Key Facts Illustration which customers receive before committing to a loan clearly sets out how compound interest will increase the amount owed over 10 and 15 years.”

Additionally, the popularity of equity release has been under-reported in the mainstream media, who have instead focused on lifetime mortgage ‘horror stories’.

More than 10,000 new equity release plans have been agreed in each of the last 4 half-year periods. Average rates for equity release products fell below 6% during April 2015 and have fallen by more than half a percentage point since December 2014.

The shape of the market is also changing considerably. Almost two thirds of customers (65%) chose drawdown lifetime mortgages in H1 2015 while 35% opted for lump sum lifetime mortgages and less than 1% took out a home reversion plan. In contrast, during H1 2007 51% chose lump sums, 44% drawdown and 5% home reversion plans.

The Equity Release Council says that the prospect of more new providers and products entering the market - as well as different funding options helping providers to develop their product portfolios - will introduce further innovation. One example, it says, is the option to make interest payments in the early years of a loan, which will ensure the market can satisfy wider demand.

Christopher Woolard says that a debate is necessary about what products and markets could exist and whether more entrants and innovation might benefit consumers with greater choice and improved products. He said that the FCA will converse with industry and consumer bodies over the autumn about what options could exist in the future.

Nigel Waterson concluded:

“We are very proud of what the industry offers and the rigorous standards in place which help people access advice and products to improve their quality of life in retirement, as many customers report. Equally, we are not complacent and take matters of advice and understanding equity release very seriously, through the work of our independent Standards Board and regular discussions with the Regulator and Ombudsman.

“With that in mind, we are extremely concerned that needless anxiety is being created and are seeking to provide clarity on queries regarding downsizing, early repayment charges, interest and the advice available to consumers.”