The Financial Services Authority's proposals to regulate sale and rent back schemes is good news for consumers and the equity release market, says Sharon Bratley, chartered financial planner Fairinvestment.co.uk.
Although the equity release
market is fully regulated by the FSA, and is a viable option for many older homeowners who have little disposable income but considerable equity locked up in their homes, it often receives quite negative press.
According to a recent survey by equity release provider Hodge Lifetime, 52 per cent of IFAs say equity release is being confused with sale and rent back, which is a very different type of scheme, and an area that is currently unregulated.
As well as being FSA regulated, most equity release providers
also sign up to the Safe Home Income Plans (SHIP) code of conduct; and where SHIP equity release
schemes always give customers the right to live in their homes for life with no monthly rent, sale and rent back schemes involve homeowners selling their homes at a highly discounted price and renting it back for a limited period – they are not guaranteed lifelong tenancy.
This means that many homeowners have gone into sale and rent back schemes without understanding fully what they are getting themselves into, and in some cases, losing both their homes and substantial amounts of money.
This has reflected badly on the equity release market, but, says Mrs Bratley, if sale and rent back schemes are to be regulated too, providers will have to be clear about the risks involved with the schemes.
"The fact that the FSA has proposed regulation of the sale and rent back market is a very positive step," said Mrs Bartley.
"Although sale and rent back and equity release generally deal with different types of customer – homeowners struggling with mortgage arrears and other debts tend to go for sale and rent back, while cash poor property rich pensioners tend to go for equity release – often, those who do go for sale and rent back are not fully aware of the risks involved or that there are other options available to them.
"This can often mean that customers are opting for sale and rent back when in fact it may not have been the best decision for them.
"In October 2008, an OFT survey found that some consumers enter into sale and rent back transactions when this is not the best option for them and that some sale and rent back providers mislead customers as to the value of their property or the security they have as tenants. They also found that some firms impose substantial rent increases or even evict tenants after a short tenancy period.
"Regulation or no regulation, sale and rent back may sometimes be the only option for some homeowners who are struggling with debt or arrears. But at least with regulation of both the equity release and the sale and rent back markets, homeowners who do need to release equity from their home will be fully aware of all the options available to them and the risks associated with each so they can make an informed decision about the best scheme for their own personal circumstances."
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