If you’re looking to release equity in your property you may have a number of concerns about whether it is really in your best interests.
It is fair to say that Equity Release has gained a bit of a mixed reputation over the years and there are now organisations and regulatory bodies that protect those who release equity in their homes.
The most prominent body that protects customers is the Equity Release Council (ERC) and this guide will explain who they are, what they do and why members of the ERC offer unparalleled products and services.
Let’s look at the Equity Release Council in more detail.
- What is the Equity Release Council?
- What Does the Equity Release Council Do?
- Who Are the Members of the Equity Release Council?
- Guaranteed Right to Stay in the Property
- No Negative Equity Guarantee
- Fixed/Capped Variable Interest Rates
- The Right to Move to Another Property
- How to Find the Right Equity Release Company for You?
- Other Protections You Have with Equity Release
What is the Equity Release Council?
The Equity Release Council is an organisation that sets high standards for equity release companies in the UK. To join the council, providers must commit to upholding the standards the ERC set out and ensure their products meet certain criteria.
Not every equity release company is a member of the council and unlike the Financial Conduct Authority (FCA) they don’t have any regulatory oversight over the overall industry.
Instead, they regulate the companies that have opted to join the ERC.
That means that if you’re looking to release equity in your property, it is a good idea to seek out companies that are members of the ERC as they offer protection above and beyond the standard protections afforded by the FCA.
What Does the Equity Release Council Do?
The Equity Release Council provides guidelines for its members that they must follow to remain members of the council. The guidelines are designed to maintain high standards and also introduce a set of safeguards to the equity release process.
Here are some of the guidelines that members of the ERC adhere to:
- Create an industry that is trustworthy by conducting business in a professional and transparent manner.
- Members must put customers first and always act in utmost good faith when providing equity release advice and products.
- Understand if there are conflicts of interest and ensure that these are quickly and effectively managed.
- Ensure that the customer has a full understanding of the product including risks.
- Members must deliver high standards at every point of the equity release process.
Alongside the guidelines and principles of the ERC, they also have specific requirements for any product that a member offers.
These requirements are:
- Any lifetime mortgage products should have a fixed interest rate or if they have variable interest rates, the rate must have a cap (maximum rate) that is set for the lifetime of the product.
- The right to remain in the property until you pass away or move into long term care.
- The right to move to another property if you want to.
- All ERC member products must have a ‘no negative equity guarantee’ which ensures customers don’t die or go into long term care owing more than their property is worth.
Lastly, members can only provide products that meet all of the requirements above.
If even one aspect of the checklist is missing from any recommended product, the member must provide a document outlining why the recommendation deviates from the standards.
This document or illustration must highlight what aspects are missing and the additional risks a customer has as a result of them being missing.
This means you will always know exactly what type of product you have, and the member will have to act in a completely transparent way including outlining any negative aspects of the recommendation they’re making to you.
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Who Are the Members of the Equity Release Council?
The Equity Release Council allows lenders, advisers and brokers and solicitors to become members of the council.
The Equity Release Council has a broad range of members from all areas of the Equity Release industry.
Unfortunately, there are also a large amount of companies that operate outside of the ERC because they don’t want to meet the high standards or pay the membership fees.
Equity release companies apply to the Equity Release Council to become a member.
Membership to the council has criteria that must be fulfilled by applicants, it isn’t a council that any company can join with ease.
Here are the application criteria:
- Applicants must pay a membership fee. It costs companies money to be a member of the ERC and each company has to pay a fee per adviser (as high as £300 per adviser) operating within the company.
- A one-off application fee of £70 is also charged to process the application.
- Any company registering with the ERC must demonstrate they have the qualifications to operate in their field.
- Any company registering must also show they are regulated by any relevant government body for the business they carry out.
- Any company wishing to become a member must adhere to the standards of the ERC.
- Companies must also agree that the ERC can make rulings in the event of a complaint or failure to meet standards.
Guaranteed Right to Stay in the Property
Equity release products are different across the industry and the Equity Release Council realised that the primary concern among borrowers was that they wanted the right to live in the property until they die or go into long term care.
At the end of the day, your property is your home. The ERC decided to ensure that anyone using an equity release product has the right to remain in their home.
You might be surprised to learn that there are some products outside of the Equity Release Council’s jurisdiction that don’t offer this protection and even some unscrupulous lenders that want to see a return on the investment sooner rather than later selling properties and forcing people out of their homes.
Choosing a lender that is governed by the ERC is without question a fantastic way of safeguarding your right to remain in the property (regardless of changes to your circumstances) until you die or go into long term care.
No Negative Equity Guarantee
When you release equity in your property, you’re getting a mortgage on the property that is payable upon death or going into long term care.
The mortgage is paid by the lender selling the property. Unfortunately, some lenders have products that end up costing more than the total value of the property and when they sell, they are unable to recoup the full cost of the mortgage.
In these instances, the borrower’s estate is charged for any outstanding money which erodes inheritances and puts a lot of pressure and undue stress on beneficiaries.
The Equity Release Council views this as an unfair trading practice and require members to offer a no negative equity guarantee on their products.
A no negative equity guarantee means that when the property is sold, the lender is unable to claim any more than the property value against the loan. Even if the property sale doesn’t recoup the loan in full.
This means that lenders under the ERC will have to stomach any negative equity losses on the mortgages themselves and not at the expense of the customers.
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Fixed/Capped Variable Interest Rates
As with all mortgage products, the range of interest rates across the entire industry vary widely. There are even a handful of lenders charging extortionate rates with no caps.
The Equity Release Council has regulated this by putting safeguards in place for borrowers to make sure that rates are either fixed entirely or that variable interest rates have an upper limit.
That means if you’re releasing equity from your property, you will be able to roughly gauge the maximum cost of the product from the outset.
There are no nasty surprises or interest rate hikes that can breach the cap put in place at the time you borrow.
Of course, none of us know how long we will live for and any calculations you might try to do to work out the maximum cost of an equity release product would be a rough approximation at best.
Getting a sense of the amount that might be outstanding at the time of you passing away or going into long term care (however rough that estimate is) can help you understand if there is likely to be any value in the property left to leave to beneficiaries.
This is considered a much fairer practice for lenders as it doesn’t leave borrowers completely in the dark with regards to the total cost of the mortgage.
The Right to Move to Another Property
You will undoubtedly know that as we get older, our lives change and the needs we have from a home change as well. It is no secret that older populations prefer bungalows to houses because our bodies don’t handle stairs as well in later life.
Mobility issues are one of the primary reasons for people to seek out different homes and the Equity Release Council realised that a house on an equity release scheme taken at the age of 55 might not be suitable accommodation for an 80-year-old.
For this reason, they decided to ensure you will be able to move property even if you have released equity in your current home.
How to Find the Right Equity Release Company for You?
There are three things you should do when seeking out an equity release product.
FCA Regulation Any company offering advice or products within the equity release sector MUST be regulated by the Financial Conduct Authority. That requirement doesn’t stop bad Equity Release companies from starting up and exploiting customers.
Make sure the company you’re dealing with is both registered and authorised to conduct equity release with the FCA. You can do this by checking the FCA register.
ERC Membership The FCA affords a basic level of protection for customers using equity release products but as discussed in this article, the products available that still fall under FCA regulation are varied and sometimes very unfavourable.
Make sure your company is a member of the Equity Release Council as they provide additional benefits and safeguards for customers and ensure you get the fairest product available.
Use an Equity Release Adviser Lastly, lenders that are both authorised by the FCA, and members of the ERC still offer different products with different interest rates and terms and conditions. Using an ERC member broker like Boon Brokers gives you the peace of mind that the lender you are placed with is best for your circumstances as well as offering the high standard ERC products.
Other Protections You Have with Equity Release
Unfortunately, outside of the Equity Release Council, there are very few protections if you’re looking to release equity in your property.
The Financial Conduct Authority offers levels of basic protection that have varying degrees of efficacy.
For example, some of the FCA guidelines are vague like ‘treating customers fairly’.
Arguably, a negative equity product might be seen to the general population as unfair, but the FCA allows firms to offer these products.
Some FCA protections are excellent though including the right for customers to complain and escalate complaints to the Financial Ombudsman Service.
In short, FCA protection is good as a basic standard but with ERC safeguards on top, you’re ensuring you get the best range of products and services on the market.
Equity release can be daunting, and you will be given a lot of important information before you take an equity release product.
Boon Brokers is a whole of market UK mortgage, insurance and equity release broker – we will be able to explain ALL information clearly throughout the process. What’s more our advice is completely FREE and with no obligation, so get in touch today!