Equity release
Last reviewed 17/09/2008: any recent updates in this colour.
This page contains information on:
- Tax and benefits - NEW
- FSA Thematic Research - NEW
FSA Report on Good Practices in the Lifetime Market
In January 2007 the FSA published examples good practice in the equity release market, highlighting practices by firms that the regulator sees as positive and should be encouraged. It also outlines poor practices observed for comparison.
Many of the good practices identified in this document are outlined in the CML's Lifetime mortgage sales process guide. These good practice notes, produced by a team of lenders and with the input of intermediaries and other stakeholders, are designed to help give confidence to lenders and intermediaries. This guide was initially developed in September 2004 to help the industry comply with the new lifetime mortgage regulation, but it also highlights best practices that go beyond the regulations in keeping with the principles of treating customers fairly. Many firms have incorporated the guide into the standard sales practices for lifetime mortgages, and this is now reflecting back in the FSA's observations.
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Another area highlighted in the FSA good practice guide is the use of specialist software by an increasing number of firms to assess customers' tax and benefits situation. As part of the advice process, the FSA requires those selling lifetime mortgages to consider whether someone will be worse off in terms of tax and benefits if they take out an equity release loan.
One such software package that the FSA observed firms to be using is Fintal. Fintal developed by the CML in partnership with Ferret Information Systems Ltd enables advisers to compare and contrast the impact of different types of equity release schemes on tax and benefits. Advisers have the choice of buying a full licence that provides unlimited searches of Fintal, or using the new pay-per-use variant which was launched in February 2006.
The software solution is absolutely critical, and most users now see it as a "must have" when selling lifetime mortgages. Tax and benefits is very complex and each it is difficult to work out each product's impact on entitlements. Individual research by one equity release lender suggests that as much as 43% of equity release cases are in some way affected by tax and benefits.
The CML has also published an annually updated guide Equity release and the impact on benefits and tax to provide a general tax and benefits guidance for lenders and intermediaries.
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This good practice document by the regulator follows up from a project of thematic research into lifetime mortgages, outlined in a final report published on 22 September 2006.
The regulator said that "there is no place in this market for firms that do not develop the necessary skills and do not implement appropriate systems to ensure they give advice." We have been concerned about this for some time, and have tried to promote corrective steps for some time. We fully agree with this statement, as outlined in our press release CML responds to second FSA review of lifetime mortgages on 19 July 2006.
The FSA also acknowleged the work done by trade associations "who are actively engaged in improving standards in the market". This reflects the FSA's equity release trade forum in which we have been involved over the last year along with SHIP, The Assocation of British Insurers (ABI), and The Association of Mortgage Intermediaries (AMI).
Our main focus of effort in the next several months will be to assist FSA actions to address the outstanding problem areas. We will also continue to promote the various initiatives we have launched over the last 18 months, and support other trade associations with theirs.
We hosted a highly successful seminar on equity release on 19 October 2006. The FSA presented detailed feedback to lenders and intermediaries from its thematic research, and lenders and intermediaries had an opportunity to discuss best practices aimed at building confidence in this market for existing and new participants.
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Equity release is a way of unlocking the value of your property, without having to move home. It is generally for older people who have either paid off their mortgage or have a very small mortgage left and should not be confused with equity withdrawal. We use the term equity withdrawal when people withdraw additional money from their homes by re-mortgaging or taking out a further advance.
There are two broad types of equity release product available in the UK today. The lifetime mortgage typically allows an older consumer to borrow against the property, and the interest plus capital "rolls up" so that they are paid back as equity upon death or sale of the property. The second scheme is the home reversion plan under which all or part of the property is sold to a firm to realise a lump sum or income, whilst the borrower retains the right to live in the property rent-free until death.
More details on the CML's views on this market can be found in the essay Building confidence in the equity release market, released in April 2006 and available below.
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Potential for growth in the equity release market
Lifetime mortgage outstanding lending by the end of 2006 totalled £6.6bn. Although the highest ever, this still represents only 0.59% of the entire mortgage market by value, suggesting a substantial scope for growth. The most recent CML statistics to the end of 2006 were published in a press release on 1 Feb 2007.
There exists much evidence that unlocking equity from homes may be desirable for many consumers. The equity release working party report by the Actuarial Profession in 2004 (to which the CML contributed) estimated that unmortgaged equity for the over-65s is at least £1.1 trillion. Housing wealth is also growing: from about 150% of GDP in 1996 to 275% in 2004. For this reason, the Actuarial Profession report predicted that annual equity release sales volumes would double from the present £1bn by 2010, and then rise to nearly £4bn a year by 2031. The Pensions Commission final report in December 2005 noted that many consumers are asset rich but cash poor, but the CML was disappointed that it did not recommend measures to help consumers unlock their housing wealth.
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We have been working to try to improve confidence in the market and to ensure that the market grows safely for lenders and consumers. We have published a consumer booklet Unlocking the value of your home - a guide to equity release which provides information for consumers on the types of equity release products available and the types of issues they should be considering when taking out an equity release loan. The Financial Services Authority (FSA) also produces its own factsheet Raising money from your home.
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Parliament approved on 24 October the amendment of secondary legislation necessary to bring home reversions (HR) and home purchase plans (HPP). The FSA is now preparing for regulation of HR/HPP which will begin on 6 April 2007. It has now published a policy statement summarising responses to its HR/HPP consultation document CP06/08, as well as the final rules for the new regulation.
The CML strongly welcomed the action by the government to bring home reversions into FSA regulation. This has created a level playing field in the equity release market, an objective this organisation had long campaigned.
