The term "equity release", when used in the UK financial services context, is given to a range of products aimed at older consumers who need or want to release value from assets (equity) tied up in the value of their homes.
There are two types of equity release products: lifetime mortgages and home reversions. This fact file explains how the schemes work and provides examples to illustrate typical features.
There is a range of providers active in the UK, which can be split into three basic types: mortgage lenders, insurance companies and specialist firms. However, compared to, say, the residential mortgage market, the number of firms involved is small and the number of providers has declined since 2008. This is due to funding issues and the long-term nature of achieving a return on investment in equity release. The trade body Safe Home Income Plans plays an important role in the sector.
In terms of regulation, equity release lending, arranging, advice and administration are activities supervised by the Financial Services Authority. Home reversions came under statutory regulation in April 2007, lifetime mortgages in October 2004. Equity release is deemed "higher risk" by the regulator, and therefore subject to additional rules and scrutiny.
There is a potential for both mis-selling and mis-buying in the equity release market. Advice - both financial advice and independent legal advice - is therefore essential for consumers considering entering into an equity release arrangement.
As well as the obvious impact on inheritance, equity release may impact on an individual's tax status and eligibility for benefits and grants. All are therefore very important considerations for customers and advisers.
Though the market is currently small (less than 1% of the residential mortgage market), there are strong demographic and socioeconomic factors indicating a potential for rapid growth in demand for equity release in the next 10-15 years despite the contraction in business volumes during the recessionary period 2008-9, which has continued in 2010 for the reasons explained above.
Home reversion plans and lifetime mortgages are complex products. To understand the features and risks, ask for a personalised illustration.