Putting your mind at rest

Claire Barker goes through the legal issues clients will need to be aware of when considering equity release

Many homeowners will be familiar with the concept of a mortgage, but when it comes to equity release, older borrowers are often less knowledgeable about what to look out for. Equity release is a term which is bandied around a lot and means different things to different people. Equity release for a couple in their thirties or forties, for example, may simply be raising more cash by increasing their current mortgage facility, and making use of the growth in house prices since they purchased their property. However, for the over-55s, equity release means something else and when they are presented with a raft of products, with terms that last for life in most instances, independent legal advice is paramount.

For the over 55s, there are two main ways of releasing cash from property: a lifetime mortgage or a home reversion plan.

Home reversion plans only account for about 5% of the equity release plans taken out in today's market. This is perhaps because of the finality of the transaction and the fact that the title deeds will be transferred either partly or entirely into the name of the investor.

However, in Britain, the nation's love affair with property shows little sign of abating, and homeowners are not keen to sign away their house and become tenants. The attraction of a lifetime mortgage is that the title deeds of the property remain in the name of the homeowner and the debt is simply secured as a loan, which offers increased flexibility, but less certainty, as there can be no way of knowing how much interest will have accrued at the point where the debt needs to be repaid.

So what should homeowners look out for when considering equity release? Financial considerations are paramount and therefore the first step should always be to obtain independent financial advice from a suitably qualified financial adviser. A financial adviser will look at the homeowner's financial situation, wishes and long-term needs.

However, once an equity release plan has been recommended, it is then the solicitor's role to break down the way in which the plan works and at this point, some homeowners can be shocked at what seems, at first glance, to be very onerous terms and conditions.

Safety net

The role of the solicitor therefore is almost to act as a safety net, following the financial adviser's suitability report, and to ensure that the homeowner fully understands the nature and effect of the equity release contract that has been recommended. The solicitor will not have carried out a factfind on the homeowner's financial position; rather he/she will explain the risks and rewards of entering into the plan, as well as explaining the legal obligations attached to it. The solicitor also has to be satisfied that the homeowner is mentally capable of understanding the plan and, if there are two owners, that they both agree on taking out an equity release plan.

When remortgaging as a younger homeowner, many clients will receive 'free legals' from the bank or building society's panel solicitors. Those panel solicitors will actually be acting on behalf of the lender, not the borrower, to ensure that the property will provide good security for the loan and that the loan is properly registered on the title deeds on completion. As such, homeowners are not advised as to the small print contained in their mortgage offer or in the lender's general terms and conditions and many most probably do not even read it. In equity release, the process is rather different in that the lender has its own solicitor and the homeowner is required to take independent legal advice before entering into the plan.

The solicitor's role in this instance is therefore to break down the legal obligations attached to the equity release plan and to ensure that, if the solicitor's report is the only paperwork that the homeowner reads, then at least they will have a good understanding of the product and the way in which it will affect them. The solicitor will go into great detail as to the terms and conditions. For example, almost all mortgages, including equity release schemes, require you to (among a number of other things):

(i) Maintain the property in good repair and condition: The lender reserves the right to check on this and if you have not complied, to carry out the work itself and to add the cost to your mortgage and charge interest on it;

(ii) Insure the property comprehensively for the full cost of rebuilding it: If your property is damaged or destroyed, you must hold any insurance payout on trust for the insurer, who may decide either to reinstate the property (most commonly) but could decide to use the money to reduce or repay the debt owed to itself;

(iii) Let the lender know if you plan to be absent from the property for more than 30 days (so that you do not invalidate your buildings insurance by leaving the property vulnerable and unsecure);

(iv) Tell the lender if you plan to make any alterations to the property which require planning permission or building regulations approval; and

(v) Obtain permission if you plan on letting any other adult (not party to the mortgage) move in.

All of these are perfectly standard mortgage conditions but homeowners may never have been advised of them before taking out an equity release plan. The decision to remove equity from your home in later life can seem daunting and when confronted with these conditions it becomes even more so. However, when professional, independent legal advice is sought, minds can be put at rest and the process becomes more straightforward. Equity release is a real option for today's older generation and it is important they understand all its implications before embarking on any plan.