How Ethical Is Equity Release in the UK in 2024?
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- Equity release is considered ethical when adhering to industry regulations and standards, but risks and individual circumstances should be evaluated.
- Ethical considerations include evaluating the impact on inheritance, understanding risks, and working with regulated lenders and advisors for transparency and protection.
- The Equity Release Council (ERC) and the Financial Conduct Authority (FCA) enforce regulations and guidelines to safeguard consumers.
- Equity release wasn't always ethical, with past deals lacking protection against negative equity.
- The ERC’s functions include lobbying, setting standards, and educating the sector and the public.
The reputation of financial products that let you access the value of your home has improved over time, and it's essential to base your opinions on up-to-date information and facts about equity release ethics.
However, major strides have been made since the 1990s when it comes to putting safeguards in place to protect consumers and the market.
These safeguards include equity release regulation through legislation and industry bodies such as the Equity Release Council (ERC)1 and the Financial Conduct Authority (FCA)2, which enforce equity release regulations and guidelines to protect consumers.
In This Article, You Will Discover:
Our objective at Every Investor’s to provide you with up-to-date information to help you make informed decisions regarding your later-life finance options.
If you’re looking at an equity release mortgage and are worried about industry standards, we hope this guide will put your mind at ease regarding equity release ethics.
What Is An Equity Release Loan?
Equity release is a financial strategy for those 55 and older, allowing them to tap into their home's capital value.
This approach is often used to provide financial flexibility in retirement, such as funding travel or healthcare expenses.
There are two primary forms of equity release: lifetime mortgages and home reversion plans.
Lifetime mortgages involve taking a secured loan against your home, repayable when the property is sold.
Home reversion, in contrast, means selling a stake in your home for immediate cash or regular payments, while continuing to live there.
Learn More: Equity Release vs Loans
Is Equity Release Ethical?
Yes, equity release is ethical when providers adhere to industry regulations and standards, but it's important to consider potential risks and individual circumstances.
While the equity release industry has matured and improved in recent years, it’s crucial for consumers to carefully weigh the potential benefits against the risks associated with these financial products.
The industry’s also worked very hard to ensure that equity release business practices protect the customer from financial loss and that there’s an industry standard of professionalism for lenders and advisors.
While it’s true that equity release products come with higher interest rates and other costs than traditional mortgages, these factors must be weighed against the benefit of financial security in your later years.
However, it's essential to consider the long-term implications, such as higher overall borrowing costs and the potential impact on inheritance.
What Are the Ethical Considerations?
The ethical considerations involved in equity release include evaluating the potential impact on your children’s inheritance, understanding the risks and costs involved, and working with regulated lenders and advisors to ensure transparency and protection.
Let’s take a closer look at these and more ethical questions:
- Transparency: Ensure your equity release provider offers clear and concise information about its plans, fees, and terms. Make sure you understand the potential risks and implications involved in the process. At the same time, be aware that releasing equity from your home may result in higher overall borrowing costs compared to other financial products.
- Fairness: Equity release plans should offer fair terms and conditions, and interest rates and fees should be competitive and transparent. Check if the provider adheres to industry standards and guidelines, such as those provided by the Equity Release Council.
- Family impact: Consider both the positive and negative effects of an equity release plan on your family and loved ones, such as providing financial support versus potentially reducing their inheritance. Discuss your intentions with family members and involve them in the decision-making process.
- Vulnerable individuals: Equity release plans are often marketed to older individuals who may be more vulnerable to financial exploitation. Ensure that the provider and any advisers are reputable and that they take the necessary precautions to protect vulnerable clients.
- Alternatives: Before committing to an equity release plan, consider the potential benefits and drawbacks of alternative ways to meet your financial needs, such as downsizing, renting out a portion of your home, or seeking government benefits.
- Environmental impact: Some equity release providers offer "green" options, which may provide incentives for energy-efficient home improvements. Choosing an environmentally responsible provider or plan can help reduce your carbon footprint.
- Reputable advice: Seek independent financial advice from a professional with expertise in equity release. An advisor should carefully assess your financial situation and future needs and help you understand and evaluate the risks associated with equity release, ensuring you make a balanced decision.
What about traditional mortgages?
Commentators have warned about the ethics of making traditional mortgage products available to retirees. This may lead to repossession if an elderly person falls ill and can no longer meet the repayments.3
Was Equity Release Ethical in the Past?
No, equity release wasn’t always ethical in the past, as many of the deals were unfair to borrowers.
In the ’70s and ’80s, many of the deals available didn’t protect borrowers from things like negative equity, leaving many elderly people in precarious financial situations.
What Was Safe Home Income Plans?
Safe Home Income Plans (SHIP)4 was the first equity release market body aimed at protecting elderly homeowners from dodgy equity release providers.
SHIP was formed in 1991.
Why Was SHIP Formed?
SHIP was formed as a direct result of the fallout from an equity release product launched in 1988 called a home income plan, which left many plan holders penniless.
It was a good product on paper, comprising two financial product components, namely an annuity or investment bond to provide an income and an interest-only mortgage to provide the initial capital.
The income from the annuity would pay the monthly interest on the mortgage, with enough spare change left over to provide the plan holder with an income.
There was a big ‘but’!
Home income plans were introduced during a time of low, steady interest rates, so they performed how they were designed to until the interest rate spike and plummeting house prices of 1990.
This dropped many plan holders into negative equity because the annuity no longer covered the high-interest rates of the mortgage nor generated any additional income.
When Did SHIP Become the Equity Release Council?
SHIP became the Equity Release Council in 2012.
The Equity Release Council (ERC) expanded its membership from equity release providers to include advisors, lawyers, intermediaries, surveyors, and other interested parties.
The Council now has over 700 members5, offers advice and education on all facets of equity release, and sets industry standards.
What Legal Safeguards Do I Have With Equity Release?
The legal safeguards you have with equity release are governed by the regulations of the ERC.
These safeguards include:
- You’ll benefit from the No Negative Equity Guarantee6, which ensures you’ll never owe more on your equity release loan than your house eventually sells for.
- Interest rates are fixed or capped on a lifetime mortgage7.
- You can continue living in your home until you die or move into long-term care.
- You can port your equity release plan to a new property, provided it meets the lender's criteria.
- All new lifetime mortgages must include the option to make penalty-free partial repayments.
- You have the right to consult an equity release solicitor of your choice.
Are There Looming Problems With Equity Release?
Yes, there are looming problems with equity release because many borrowers are focused on solving immediate rather than future financial needs.
People live longer8, so if you take out an equity release plan in your 50s or 60s, you could be locked into the deal for as long as 30 or 40 years.
This could impact how much your heirs will ultimately get when you die, and the house is sold to repay the equity release.
Another consideration is whether there’ll be enough money left for your long-term care once your home’s sold, should you need to move out of your home (and terminate your equity release plan).
Why do people take out equity release too early?
Many people retire with unpaid debt, meaning they’ll likely take out equity release earlier.
What Are the 3 Main Functions of the Equity Release Council?
The 3 main functions of the Equity Release Council are lobbying, setting standards, and educating the sector and the public.
Let’s dive a little deeper:
- The council lobbies across its various stakeholders, including government, regulators, industry, and other parties, to positively influence public policy development.
- It sets standards of practice to which its members must adhere.
- The Council provides training to the sector based on its competency framework.
What Are the 3 Primary Functions of the Financial Conduct Authority (FCA)?
The 3 primary functions of the Financial Conduct Authority are to protect consumers, ensure industry stability, and promote healthy competition among financial service providers.
These functions entail:
- Protecting customers by arming them with the knowledge to make the right choices about financial products and services.
- Ensuring industry stability by ensuring financial services firms comply with regulations.
- Promoting healthy competition between financial services providers to prevent market abuse such as price-fixing and collusion.
Consumers should always check the FCA Register to verify that their chosen provider or advisor is authorised and regulated by the FCA.
What’s the Financial Services & Markets Act?
The Financial Services and Markets Act9 is the legislation that created the Financial Conduct Authority as a regulator for insurance, investment business, and banking, and the Financial Ombudsman Service10 to resolve disputes as a free alternative to the courts.
Does This Mean That Equity Release Is Ethical?
Yes, this means that equity release is ethical, as the Financial Services and Markets Act created the bodies that protect consumers from unethical practices and regulate the industry.
How to Make an Ethical Decision When Choosing Equity Release
How to make an ethical decision when choosing equity release starts with making sure that your lender’s a member of the Equity Release Council.
This way you’ll have recourse if anything goes wrong or you’ve been treated unfairly.
If you’re using a broker, check their credentials and ensure they’re registered with the FCA.
Is Equity Release Always a Last Resort?
How Will Equity Release Affect My Family?
How Can I Ensure That Equity Release Doesn’t Hurt My Family?
Equity release is a complex product, and while past missteps have led to a lingering stigma, the industry has made significant improvements to ensure ethical practices and consumer protections.
The modern equity release industry is well-governed, so you’ll be protected if you ensure you’re dealing with a lender that belongs to the ERC and adheres to that organisation’s code of conduct.
Equity release is a big financial decision and always requires prospective borrowers to receive advice from a professional equity release advisor.
Speak to your equity release broker or advisor if you’ve got any more questions about equity release ethics.
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