Equity Release  

Key points to consider when advising on equity release

  • To remind oneself of the principles of advising on equity release.
  • To understand that equity release might not be the immediate answer.
  • To learn about the range of features available on equity release products.
Key points to consider when advising on equity release

Nearly 20 years ago I told the first of many clients that equity release was not right for them.

For someone with a background in mortgages, where a mortgage was the integral method for a house purchase, it was strange to enter an advice arena where choice rather than need was a major element of the process. 

Still today, when you look at the motivations to release housing equity, choice still drives many to do it, with need being in the minority.

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What we quickly learned all of those years ago was that such a choice purchase needs a very different approach, both in the way the product is presented and the way in which advice is given. Most of all, a great deal of patience is needed.

Post-mortgage regulation the then Financial Services Authority carried out consumer research looking at the processes followed by those taking out lifetime mortgages. The regulator was keen to examine the customer journey to understand more about the decision process for consumers.

The findings echoed what we had already seen for many years: consumers typically researched the subject for between three and six months before even engaging with an adviser; wanting to feel knowledgeable enough to engage with someone on the subject before considering it in more granular detail.

In advising on equity release, the first acceptance needs to be that suitability is paramount, not in terms of the particular recommendation of an equity release product, but more about whether equity release is the most suitable option compared with alternative options that a client may have.

What is vital in this requirement is not to mistake this as meaning that equity release is a last-resort option as many seem to interpret it, and that it should only be considered when all other options have been explored and rejected. 

The danger in this approach is a completely negative bias towards equity release. This is neither what the regulator wants nor asks for.

Exploring alternatives

The Mortgage Conduct of Business rule 8.5A.6 states that one of the factors an adviser must consider is “…alternative methods of raising the required funds…” – this could be other forms of borrowing, grants, downsizing, or utilising other funds or assets that they may have.

It is vital to fully explore the alternatives. This advice role is like no other: you cannot limit your technical knowledge to just mortgages and lifetime mortgages; pensions, investments and knowledge of other borrowing options are crucial. Benefit knowledge is also a must.

Many see a client claiming means-tested benefits such as pension credit or council tax benefit as a barrier to releasing equity.

This could not be further from reality if you know the rules. The regulator does not expect you to be a benefits specialist; however, some knowledge will pay dividends. An incorrect assumption is that releasing capital will, once savings are over a certain threshold, reduce their benefit entitlement.