Equity release can be an excellent option for homeowners in the UK who are over 55 and looking to access the wealth tied up in their property. However, a common concern for potential equity release customers is what happens if the company providing the plan goes bust. This is a legitimate question, especially given the long-term nature of equity release products.
In this article, we’ll explore the protections in place to safeguard your investment and ensure your peace of mind if your equity release provider were to go into administration or cease trading.
What Is Equity Release?
Before we dive into what happens if a provider goes bust, it’s important to understand what equity release entails. There are two main types of equity release:
- Lifetime Mortgage: The most common form of equity release in the UK. It allows homeowners to borrow against the value of their home while still retaining ownership. The loan is repaid (along with interest) when the property is sold, typically upon the homeowner’s death or if they move into long-term care.
- Home Reversion: In this scheme, you sell a portion or all of your home to the equity release company in exchange for a lump sum or regular payments. You can continue living in your home until death or moving into long-term care.
Both products are long-term financial arrangements, often lasting many years. Given this timespan, it’s natural to worry about what would happen if the equity release provider goes bust during the course of the plan.
Protections for Customers: The Role of the Financial Conduct Authority (FCA)
The good news for equity release customers in the UK is that the market is highly regulated. Providers must be authorised by the Financial Conduct Authority (FCA), which means they are subject to stringent regulatory standards. The FCA ensures that all equity release providers operate fairly and transparently.
In the event that a provider were to go bust, customers are protected by the Financial Services Compensation Scheme (FSCS).
The Financial Services Compensation Scheme (FSCS)
The FSCS is a safety net for consumers if a financial institution fails. It protects customers of UK-regulated financial services firms, including those providing equity release products.
If your equity release provider goes into administration or ceases trading, the FSCS will step in to ensure you do not lose any money owed to you. For equity release, the following protections typically apply:
- For Lifetime Mortgages: Since your loan is secured against your property, you are not at risk of losing your home or any funds. The terms of the loan agreement remain valid, and another lender or administrator may take over your loan and continue servicing it under the same terms.
- For Home Reversion Plans: If you’ve sold a portion of your home under a home reversion plan, the FSCS ensures that your agreement remains in place. Any portion of your home that was sold is still considered sold, and you retain the right to live in the property for the rest of your life, as per the terms of the original agreement.
How the FSCS Works
If an equity release company goes bust, the FSCS may either:
- Transfer the policy to another provider: The FSCS can arrange for another FCA-authorised firm to take over the servicing of your equity release plan. This ensures that your loan or reversion plan continues as originally agreed.
- Compensate you directly: In the unlikely event that no other provider can take over, the FSCS may offer you compensation. This compensation covers any financial losses directly related to the company going bust.
For lifetime mortgages, your debt remains linked to your property and will be recovered when your home is sold, as originally planned. For home reversion schemes, the FSCS ensures that you retain your right to live in the property for life, as agreed in the original contract.
The Equity Release Council: Further Protections
In addition to FCA regulation and FSCS protection, many reputable equity release providers are members of the Equity Release Council (ERC). This is a voluntary body that sets best practice standards for the industry and ensures consumer protection.
The Equity Release Council provides additional assurances, such as:
- No Negative Equity Guarantee: This ensures that even if house prices fall and your property is worth less than the amount owed, you or your estate will never owe more than the value of the property when it is sold. This protection applies to lifetime mortgages, which are the most common form of equity release.
- Guaranteed Right to Stay: In home reversion plans, the council ensures that homeowners retain the right to live in their property for life, regardless of any changes to the company offering the plan.
These additional safeguards mean that equity release customers can rest easy knowing that they will not be forced out of their home or left with unaffordable debts, even if the provider encounters financial difficulties.
What You Should Do
If you have an equity release plan or are considering one, you can take steps to further protect yourself:
- Choose an ERC Member: Always choose a provider that is a member of the Equity Release Council to benefit from extra consumer protections.
- Check FCA Authorisation: Ensure that your chosen equity release provider is authorised by the FCA. You can verify this through the FCA’s public register.
- Speak to a Qualified Equity Release Adviser: It’s crucial to seek advice from a qualified equity release adviser before committing to any plan. An adviser can help you understand the risks and protections involved, and ensure that the product suits your financial needs.
Conclusion
While it’s natural to worry about what might happen if an equity release company goes bust, UK regulations offer strong protections for customers. The combination of FCA regulation, FSCS compensation, and additional safeguards from the Equity Release Council ensure that you can enter into an equity release plan with confidence.
Before making any decisions, always consult with a qualified equity release adviser who can guide you through the process and ensure that your financial future is secure.
