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Is this the next scandal?

By: Rupert Jones

The Guardian, March 29, 2003

The Financial Services Authority is being urged to police home reversion schemes to prevent the elderly being cheated.

A warning was sounded this week that elderly people could be ripped off by "cowboy" salesmen if one of the main types of equity release scheme is not regulated by the chief financial watchdog.

The Consumers' Association says that if so-called home reversion schemes are not policed in the same way that other equity release products are due to be, "there will be mis-selling without question".

Equity release products allow older people to unlock some of the value tied up in their home. It's a booming market, and a combination of people living longer, shrinking pension funds and low interest rates mean we are likely to see many more "asset-rich, cash-poor" pensioners taking advantage of these schemes to supplement their income.

But as well as being complex and often costly, these schemes have up until now had another downside. Unlike a lot of other financial products, they are not regulated by the Financial Services Authority, which in theory means people have less protection if things go wrong.

However, it was announced a while ago that mortgage-based equity release products - including the popular "roll-up" mortgage schemes of the type offered by companies like Norwich Union and Northern Rock (see below) - will be policed by the FSA from October 2004, the date it is due to take over the regulation of all home loans.

But concern was expressed about the fact that home reversion schemes were excluded from the FSA's remit and looked set to remain unregulated.

These schemes typically involve a homeowner selling all or part of their property at a discounted rate in return for either a cash lump sum or an income for life.

They are then allowed to live there rent-free for the rest of their life. The amount paid out depends on a number of factors including the age of the homeowner. The minimum age for these schemes is usually 65.

Providers of home reversion schemes include Epsom-based BPT Bridgewater and Bedford-based Home & Capital Trust, both of which are members of Safe Home Income Plans (www.ship-ltd.org), the trade body for the industry. All 12 Ship members offer a "no negative equity guarantee".

With home reversion schemes, you can usually release anything from 30% to 100% of the property value depending on the provider.

So if you sell 50% of the value of your property, the company will expect to receive 50% of the sale price when the house is eventually put on the market after your death. In response to the concerns that have been voiced, the government said in December that it would be "looking at options to create a level playing field for the regulation of equity release [mortgage] and home reversion plans to protect consumers and make the market work better".

Since then, though, little has been heard about if or when this will happen.

This week, Conservative MPs Michael Howard and Stephen O'Brien, shadow chancellor and shadow paymaster general respectively, held a seminar at which they called on the government to make a definite commitment to regulating home reversion schemes in the same way as other products.

Mr O'Brien said the current far-from-level playing field has the potential to distort the market and could open the door to "the cowboy element".

The uncertainty is putting off some mortgage lenders from entering this market. Nationwide building society - one of many that doesn't have a home reversion product at the moment - says that in the present climate it is unwilling to develop one.

This week a Treasury spokesman said it had already made clear it would consult on these schemes to see whether there was a case for regulation. An announcement would be made "in due course," he added.

You should always take independent financial advice and talk to your family before signing up for any equity release scheme. "When people go for a product like this, they need shedloads of advice," says a spokesman for Help the Aged.

The other schemes

Home reversion schemes are just one type of equity release product. The others are:

Roll-up mortgage schemes (also known as lifetime mortgages): These are the most popular equity release products. These allow you to release a percentage of the value of the property in the form of a lump sum. Some let you take a regular income. There are no monthly payments to be made and you can live in the house until you die or move into long-term care. At this point, the loan plus interest is repaid, usually from the sale of the house.

However, it is important to be aware that with these the interest compounds up - so you are paying interest on the interest. That means that over a period of several years, the debt can balloon.

A number of major institutions offer these mortgages including Norwich Union, Northern Rock, Legal & General Mortgages, Portman building society, Scottish Widows and Stroud & Swindon building society.

Norwich Union's Flexible Cash Release Plan is one of the best-known products but the rate of interest is high. It's fixed at 7.55%.

Northern Rock has a standard home equity release mortgage (Herm) where the current rate of interest is 7.19% fixed for life. There is also a capped rate option with a variable rate. Northern Rock also offers two "cash plus" versions which allow people to take a fixed monthly payout.

Colin Slater at specialist national IFA Key Retirement Solutions, based in Preston, reckons the most competitive product in terms of rate is Legal & General's fixed at 6.95%.

Ray Boulger at mortgage broker Charcol likes Northern Rock's cash plus deals. He says that if you want to use equity release as a way of supplementing your pension, then you ideally need a scheme that allows you to take equity out of your property preferably on a monthly or quarterly basis. Northern Rock is the only provider with a product allowing this sort of monthly drawdown.

Mr Boulger says it arguably makes little sense to sign up to a deal with a rate of around 7% that gives you a lump sum which you then invest in a savings account paying perhaps 3%-4%.

Home income plans: With these, you take out a mortgage on your home at a fixed rate of interest and the money is used to buy an annuity. The returns from this pay the mortgage interest and also provide the plan-holder with some income.

But plummeting annuity rates have made them much less attractive. It's been suggested that unless you are in your eighties or older, a home income plan is probably not going to be the most appropriate option. Hodge Life (part of Julian Hodge Bank) and Allchurches Life offers them.