FSA is crying wolf over dangers of equity release

PENSIONERS considering taking out equity-release schemes are advised by all the consumer protection bodies to make sure they tell their families what they are doing. Now, why is that? Isn’t it their money to do with as they wish?

Were pensioners required to notify their families when they put their money into with-profit bonds, or into investment trusts which subsequently halved the value of their estates? Were they told to warn their families in advance when they went into split caps?

According to the FSA, equity-release products are high risk. In order to understand their criteria, I looked through the list of investments on their website. It appears that investing in shares in UK companies is medium risk. They have labelled UK corporate bonds low to medium risk, and with-profits bonds low risk.

Compare the risk profile of an equity-release scheme, which is a loan, usually at a fixed rate, to a stock market investment. How ludicrous it is to put them in the same category.

The reason the FSA has labelled these products high risk is that it has completely failed to spot any of the truly dangerous products that have come on to the market since it was formed, and is now covering its backside by issuing dire warnings willy-nilly.

But there is a danger in labelling new products such as equity release high risk. If everything is made to look dangerous, consumers will become inured to the real dangers in dishonest products and make no effort to differentiate between them. From saying nothing, the FSA is now crying wolf.

There are a number of equity-release schemes on offer. You can borrow money against your home and pay it back when the house is sold, you can take a lump sum or an income, or you can sell your house at a discount and continue to live in it.

There are similar products on offer from numerous competing sellers, which I would have thought was a good thing. Having a choice means that the decision becomes more time-consuming, but not necessarily more difficult and not necessarily more dangerous.

Each option has terms, conditions and ramifications, but I still have to find out what these deplorable hidden dangers are.

I did not start off with the view that equity-release schemes were wonderful. I started off with the view that there was probably something wrong with them, and if I pushed on for long enough I would find the snag.

But I haven’t. The products on offer from mainstream lenders which are members of the self-regulatory body SHIP seem to me to be fairly priced and reasonably marketed. The examples contain a sufficient number of ‘what-ifs’ for borrowers to be able to work out what would happen if interest rates rise or fall, if property prices go up or down. Interest rates are higher than a conventional mortgage, but acceptably so.

All the members of SHIP offer negative-equity guarantees, which are essential, and purchases have to be conducted through an independent solicitor.

What are the dangers? The worst possible outcome is that the property falls in value while the loan is growing. Then the negative-equity guarantee steps in and one nets off against the other. Worst case: nothing is left.

But to put this in context, the loan would typically be about 30% of the value of the house and this, plus interest, would have to be greater than the value of the remaining 70%.

The problem in the eyes of the regulators and the consumer agencies is that the borrowers are elderly and they consider them to be unable to make informed decisions, they’re just too coy to come out and say it.

They are hoping to avoid mis-selling allegations and accusations that they have not regulated the area with sufficient care when the younger generation looks at the depleted estate and complains that their parents withdrew all the cash and that they didn’t know what they were doing.

Here we appear to have a case where the product is legitimate but the consumers are questionable, rather than the other way around.

As is usually the case with financial products, a large part of the problem is in the wording. Anyone who designs such unhelpful language deserves to be considered with scepticism, and in this the product developers have done themselves no favours.

First of all, the title ‘equity release’ calls to mind the schemes in the 1980s when equity was borrowed and invested in the stock market. Enough said.

Second, equity release is supposed to convey a satisfactory sense of getting back, for free, some of the accumulated value of your house. Equity is a paper profit, it doesn’t exist unless you sell your property and someone gives you a cheque. And if you do really want to release the equity, that’s what you should do - sell the house. Equity-release schemes are loans secured against the home.

I prefer the term ‘home loan interest roll-up’. Why should these products all be squeezed into two-word names anyway? The completely unhelpful title ‘reversion mortgage’ should be replaced with ‘sell your house now at less than its true value but get some cash and continue to live in it till you die’.

The property market seems to me to be an enormous boon for people whose pensions have been depleted through no fault of their own, who have put their money in good faith into products labelled low to medium risk by the regulators, and now find that they do not have enough money to live off.

At least one thing’s going right for them. In the past, if the stock market was down, the economy as a whole tended to be weak and most investments would have been performing pretty poorly.

This time around, the stock market has taken a dive but there is a corresponding profit to ease the pain.

Why on earth should people not borrow money against the value of their homes and take some cash during their lifetimes to supplement their pensions?

Pensioners should not feel obliged to tell their offspring about their equity-release schemes, even when they intend to indulge in so-called ‘aspirational’ purchases. This is patronising and intrusive.

In any case, one delightful consequence of equity release is that the person who is likely to miss out is not the son who’s counting on paying off his record credit card bill with his parents’ inheritance, but the Chancellor of the Exchequer, who should have raised the inheritance tax threshold years ago.