An undercover investigation by Which? finds big differences in the quality of advice on equity release.
A mystery-shopping investigation into the quality of advice on offer from qualified equity release advisers has found a number of key failings. The investigation – which consisted of 22 visits – found only two cases of excellent advice, with four advisers failing our tests.
Equity release investigated
The majority of visits – 12 – were average, with advisers failing on a number of key benchmarks. Four visits were almost perfect, but missed one or two key points.
In the worst example one adviser suggested that our 75-year-old researcher – who was looking for a bit of money to carry out essential maintenance – instead take out significantly more and invest it. This is incredibly poor advice as investment returns after tax are unlikely to beat the borrowing costs of releasing more equity.
Equity release schemes typically let you draw income from your property and remain in your home by selling a portion of your home. You can take the amount as a lump sum, or take some now and draw the rest later – known as a drawdown scheme. However, with interest rates between 6% and 7% the debt grows, typically doubling after 10 years – withdrawing £50,000 now for instance would come to almost £100,000 ten years later.
What we found
A good adviser should discuss their status, how they are regulated, how much of the market they cover, and their fees at the beginning of the conversation. Less than half of the advisers tested carried out a full discussion of these issues, with three failing to discuss their fees and some failing to provide a disclosure document as required by FSA – the Financial Services Authority – rules.
Advisers should conduct a full fact-find, enquiring into income, debt and savings, but also breaking down your spending fully to establish what you can, and can’t, afford. Most did this but five didn’t, and queries into income and debt were frequently insufficient in their detail.
Equity release is a complex and life-changing issue, so it’s vital that a good adviser explains it properly. They should explain both schemes – home reversions and lifetime mortgages – as well as discussing the interest rates and how the debt grows, downsides and limitations of equity release and how this can change future options. They should also discuss house prices and that they could go up and down and also discuss the costs of setting up these schemes. 12 dealt with these issues comprehensively, but nine failed to discuss basic product features, three failed to describe the interest rate and how interest costs grow over time, and six advisers failed to mention that house prices could go down.
As equity release is so expensive it’s important for the adviser to discuss alternatives such as downsizing, but also borrowing money from family, or taking in a lodger. Ten of the advisors we spoke to failed to do this adequately.
With a ‘lifetime mortgage’ you are borrowing a lump sum of money, so it can impact your benefits entitlement. In 12 visits we posed as a consumer with a very low-income where this would have been an issue, but in five of those visits the advisers failed to mention benefits at all. Eight advisers also failed to mention local authority grant schemes, which may have applied to our situation.
Equity release schemes only expire when you die or permanently leave your property, for example when entering a care home. If you want to quit the scheme early you may have to pay exit penalties which can be substantial. However, nine of the advisers we spoke to failed to mention this at all.
What to do
For those with high-value properties, a reasonable income, but no savings or access to traditional mortgages equity release can be an option. However, it’s vital that you get comprehensive advice first.
Anyone considering equity release should discuss it with their family first, before speaking to a number of different advisers to get the whole picture. Get written information, including an ‘Initial Disclosure Document’ and a ‘Key Facts Illustration’ as well as a description of any fees at the start of the conversation.
Low-income homeowners should carefully consider the impact on benefits, and those seeking money for essential maintenance should approach their council first.