Does equity release deserve its reputation?

Here’s an example of a problem it can tackle: an elderly couple with no savings still owe money on their mortgage; they rely on benefits, some of them means-tested; and the mortgage, though small in relation to the value of the home, is a significant burden to them. What to do?

Sell-up and move somewhere smaller and cheaper seems like the obvious decision. Now that the children are gone the couple do need so much room, and a smaller place would be easier to maintain.

When the couple talk to friends and family about what they should do, that is the one solution everyone likes. It means affordable monthly outgoings and still having a property to pass on to the kids. 

So they start to look around for a place to move to. Nice bungalows might be smaller than houses, but they attract a premium price.

In the neighbourhood they have always known, where their family and friends live, there is nothing that is both suitable and affordable. If they moved further away, they would be isolated at a time they are becoming more reliant on others. 

Equity release is often the best solution

So they turn to professional advice and the suggested solution is equity release. The couple are concerned, and their children are worried. Thirty years ago, equity release had a bad name. That has changed. 

For example, clients no longer run the risk of negative equity. Other product standards set by the Equity Release Council include a cap on interest rates and the right to move to another property if it is still acceptable as security for the loan. 

But even the best standards always need to develop and evolve.

Following a review of later-life mortgages in September 2023, for example, the Financial Conduct Authority removed or amended nearly 400 financial promotions for equity release and said it was “disappointed” to find that firms had not been acting on previous findings. 

The FCA review found “many examples” of intermediaries who did not carefully consider the income and expenditure of borrowers, who minimised discussion of alternatives and who put sales before customer outcomes to push customers towards equity release products. 

As the FCA points out, equity release products are complex and often sold to those who might be in vulnerable circumstances: “It’s essential they are fully informed and receive suitable advice”.

The adviser needs to understand what selecting equity release will actually mean for the individuals involved and what other options might be available to them. Advisers also need to act in the best interests of the consumer. But, often, the best advice is to use equity release.

Consumer duty demands more of advisers

The consumer duty rules spell out what is involved: the adviser will have to ensure that the customer is able to make a good decision by explaining the product in a way the customer can understand, and at an appropriate time; the products have to meet the needs of the customer and work in a way the customer expects; the pricing has to be justified, explained and offer fair value; and customers should also be able to cancel or switch products as easily as they bought them. 

That should offer a sound bulwark between consumers and any danger of mis-sold equity release products.

But how do advisers get to know what equity release actually involves and who ought – and ought not – to be using it? Explaining and justifying pricing, and making sure it offers fair value is, for example, not straightforward. Until recently, only fully qualified professional advisers could hope to tackle the role well.

Meeting the needs of Gen X

But as society ages and defined benefit pension schemes become a rarity – the number of private sector employees still accruing new defined pension benefits was under 900,000 in 2021 – equity release will become more important.

In particular, the government says it fears “a likely crisis of under-saving that will crystallise as generation X retires”.

People in Generation X were born in the years 1965 to 1979 and they are the people for whom “auto-enrolment arrived too late” and who either never had access to DB pensions or found they were withdrawn early in their savings careers.

At the same time, it is estimated that the over 50s hold nearly 80 per cent of all the UK’s privately held housing wealth.

Releasing that wealth, for many people, could mean the difference between a comfortable retirement and a struggle.

A major shift is coming in how people manage their housing wealth, and mortgage advisers need to be ready to tackle that.  

John Somerville is director of financial services at LIBF