Is this the new PPI scandal? Financial watchdog announces probe into booming equity release market

Fears of an equity release mis-selling scandal have sparked a probe into the booming industry by the regulator.

Record numbers of older homeowners have been turning to the loans – a cash lump-sum based on the value of their property that is paid off when they die – with £2.8billion borrowed in the first nine months of the year.

But the loans come with compounding interest rates that mean the debt amount can soar, wiping out the value of homes and leaving families with no inheritance.

Experts last night said the industry was ‘ripe for mis-selling’. While the industry watchdog, the Financial Conduct Authority (FCA), has not yet launched a formal investigation, it promised to take action if it found evidence of ‘harm’ to consumers.

Former pensions minister Baroness Altmann, now a campaigner for the elderly, said: ‘I am very concerned because people do not always understand how pernicious the roll up of interest can be. They borrow a small amount and end up losing their house. The terms are often quite difficult to understand, which means it is a very risky type of borrowing.’

Equity release allows homeowners aged 55 and over to borrow cash based on how much their property is worth. The debt is repaid only when they die or go into care. Last year more than 80,000 homeowners unlocked a record £3.9billion of property wealth.

So far this year a new equity release product has launched every two days, and there are now more than 300 plans on the market compared with 73 just three years ago. But there are also concerns that financial advisers might be motivated to sell inappropriate loans by the commission offered from equity release firms.

Consumer expert Justin Modray, of Candid Financial Advice, said: ‘While equity release can be useful for some, it’s ripe for mis-selling because most equity release providers pay sales commissions which may colour an adviser’s judgment. I’d like to see sales commissions scrapped in favour of explicit fees, as well as better value-for-money products coming into the market.’

It is feared that equity release could soon echo the PPI mis-selling scandal which has rocked Britain in recent years. The insurance was added to loans, credit cards and mortgages for decades, and compensation payouts have cost the banks more than £50billion so far.

The FCA’s action on equity release comes after its former mortgage manager, Lynda Blackwell, warned last month that the market needed a ‘big wake-up call’ as elderly borrowers were at risk of being sold inappropriate or expensive loans. Writing in trade magazine Mortgage Solutions, she said: ‘The FCA really needs to think again about this part of the market because this has the potential to turn into a very serious problem years down the line.

Equity release allows homeowners aged 55 and over to borrow cash based on how much their property is worth. The debt is repaid only when they die or go into care (stock image)

‘This market is growing rapidly and, as the only realistic option available to increasing numbers of older customers, the numbers potentially being given advice that could be shown later to have cost them dearly is rising daily.’

An FCA spokesman said it had been undertaking ‘exploratory work to understand lending into later life’, which includes mortgages that extend into retirement and interest-only loans for require older borrowers. He added: ‘It aims to help us better understand the market and any potential harms and how these can be reduced. Where we see harm, we will take action.’

Jim Boyd, chief executive of the Equity Release Council, said: ‘With more people living longer, there is an important debate to be had about offering consistent safeguards.’