CH1 Introduction to Equity Release

Question 1

1.1 What is a Lifetime Mortgage?

Answer 1

Homeowner takes out a loan with rolled up compound interest, in return they receive a cash lump sum, no need to pay until die or move into long term care, on Death or entry into long term care the amount borrowed plus any interest owed is repaid usually with the proceeds of sale of the property

Question 2

1.1 What is a Home Reversion Plan?

Answer 2

60 Plus, Some or all of the property is bought by the home reversion provider, they retain the right to live in the property unti they die or move to long term care, on death or entry into long term care the property is sold and the home reversion provider receives their share of the property, the homeowner becomes a tenant. The occupier (former owner) is on a lifetime lease.

Question 3

1.1 What is the definition of a Vunerable Customer?

Answer 3

Someone who is especially susceptible to detriment as a result of their personal circumstances, particularly when a firm is not providing appropriate levels of care.

Question 4

1.1 What are 5 ways to help a Vunerable Customer?

Answer 4

Arrange phone calls at a time to suit the customer, Conduct several short calls or meetings rather than one or 2 long ones, make customers aware of Lastime Powers of Attorney, Be aware of customers communication preferences, be sensitive to timings, make customers aware of available support.

Question 5

1.1 What criteria must be met in order to proceed with Execution only?

Answer 5

The customer has rejected the advice and requested Ex Only. The cust has identified which ER transaction they require. The cust has been clearly informed on a durable medium then they will not benefit from the protection of the rules on assessing suitability; the cust has been advised that ER is unsuitable for them in that case; the adviser is not required to assess the suitability; The customer has provided written confirmation that they are aware of the protection offered when assessing an and want to proceed on an Ex only basis.

Question 6

1.2.3 What is a RIO Mortgage?

Answer 6

There is no term, the loan is repaid on death or moving into long term care. But the client must demonstrate they have sufficient pension income to cover affordability. Monthly payments are made to cover the interest. This may be a good option if the client has a good pension and wants to leave as much as possible to dependents.

Question 7

1.4.1 Regulated activies are as follows

Answer 7

Entering into, Administering, Arranging and Advising on a regulated lifetime mortgage or home reversion plan.

Question 8

1.2 Who are the 4 regulated market participants

Answer 8

Providers, Administrators, Arrangers and Advisors. Providers and Administrators are usually both the same and are the bank. Arrangers and Advisors are usually the same and need an equity release qualification.

Question 9

1.4.1 Who are the parties to a lifetime mortgage who are not subject to FCA regulation, but have regulation of their own?

Answer 9

The solicitors and Surveyor

Question 10

1.4.2 How does the FCA define lifetime mortgages

Answer 10

Only available to borrowers over a certain age, The lender may not specify a term, they will no require the loan to be repaid until the client dies, leaves the property to live somewhere else which includes long term care, the customer sells the property,

Question 11

1.4.3 What rules do providers of regulated mortgage contracts have to comply with and when did it come in?

Answer 11

The EU Mortgage Credit Directive (MCD) introduced 21 March 2016

Question 12

1.4.4 What is a Home Reversion plan?

Answer 12

The Plan provider buys all or part of a qualifying interest in land from an individual or trustees, the seller is entitled to occupy at least 40% in connection with a dwelling, the arrangment specifies the entitlement to occupy with end when the person dies or moves to another property or goes into long term care. Or a specified period of a least 20 years from the date the seller entered into the arrangment.

Question 13

1.4.5 What do we mean by an Unauthorised reversion provider?

Answer 13

A reversion plan may be entered into which does not meet the requirements for FCA regulation and they are not carrying out regulated activies.

Question 14

1.4.6 Regulated sale and rent back agreements- what we’re they?

Answer 14

These are similar to home reversion plans, it is when they sell their property to a company because they cannot afford their mortgage but they are allowed to stay in the property. In response to these concerns sale and rent back came under full regulation since June 2010 as part of MCOB.

Question 15

1.4.6 What does the FCA define a regulated sale and rent back agreement to be?

Answer 15

The provider buys all of part of the qualifying interest in land, the agreement means that the former owner would pay market rent. This is separate from a regulated home reversion plan.

Question 16

1.5 Regional Variations - what do we mean by this

Answer 16

Equity release Schemes have regional variations. For example lease law in Scotland if different from that in England and Wales. Most companies will not lend on a property in Northern Ireland. Some providers do not operate in certain areas of the country.

Question 17

1.6.2 What is the role of the solicitor in Equity Release Transactions

Answer 17

To ensure that the customer is aware of the change of ownership in the case of a home reversion plan and of mortgaging the property in the case of a lifetime mortgage. The customer understands the recommendation and obligations in the lifetime mortgage agreement. is aware of any legal issues relating to the proposed agreement. The solicitor acts a ‘safety check’ for the customer to be aware of their legal position. The solicitor also has a duty of care to ensure the customer has the mental capacity to enter into the equity release arrangement.

Question 18

1.6.2 What warning is manditory under MCOB rules for a Lifetime Mortgage? What extra text is needed for a Home Reversion Plan?

Answer 18

Check that this mortgage will meet your needs if you want your family or others to inherit your home. If in doubt seek independent legal advice’ FCA 2007a - Added for Home reversion plans is the text ‘A home reversion is a complex transaction’

Question 19

1.6.3 What should Independent Legal Advice explain to the customer?

Answer 19

The future ownership implications (will there be a mortgage in place or will it be owned by a 3rd Party. The implications of the lease agreement on a reversion scheme, ongoing responsibilities for the owner or tenant, what will happen at the end of the arrangment.

Question 20

1.7 The Equity Release Council- Who are they and what do they do?

Answer 20

The ERC is a trade body which represents the Equity release sector and exists to promote high standards of conduct and practice in the provision of equity release. Members agree to adhere to the principles but membership is voluntary.

Question 21

1.7 What was the predessessor to the Equity Release Council?

Answer 21

The predecessor body was SHIP - Safe Home Income Plans and it has been incorporated into the Equity Release Council.

Question 22

1.7.1 What are the Equity Release Council overarching principles?

Answer 22

Members shall - Promote public confidence in equity release, act at all times in good faith with the best interests of the customers being paramount, and treating customers fairly in all actions. Ensure conflicts of interest are identified squifly and managed fairly; deliver suitable customer outcomes.

Question 23

1.7.1 What are the Equity Release Council required customer outcomes?

Answer 23

Advice must be clear, transparent and imparial; products and services suit customers needs and are fairly priced; identify and provide appropriate support to customers who may be exposed to physical, mental or financial vulnerability at any point of contact. Customers will be confident they will be able to live in their own home for as long as they wish or move to a suitable property. Make sure customers undertand their rights an responsibilites at every contact

Question 24

1.7.1 What are the 5 product standards that the Equity Release council have?

Answer 24

All 5 must be met for an advisor to tell a customer that a product meets all 5 standards. Lifetime Mortgages - Interest must be either FIXED or if variabe there must be a CAP fixed for the lifetime of the loan. Right to remain for the borrower until they move to another property. Right to move to another property if new property is acceptable. No negative equity guarantee; right to make penalty free payments subject to lender criteria.

Question 25

1.7.1 Explain the no negative equity guarantee

Answer 25

The provider will cover the costs of any shortfall in regard to the interest plus roll up plus costs and the property sale price. The dependents will not be left with debts to pay.

Question 26

1.7.1 What are the ERC rules for customers in relation to Independent Legal Advice?

Answer 26

The customer must choose their own solicitor, the customer and their solicitor must sign a certificate confirming the rights and obligations of both parties have been explained to the customer. Customers must be provided with fair, simple and complete presenations of their plans. Benefits and limitations and any objigations for the customer. It should include all costs that the customer has to bear in setting up the plan, tax implications, their position on moving house and effect of changes in house prices on their loan.

Question 27

1.7.1 What does the Equity Release Council do for customers

Answer 27

It provides customers with a degree of certainty about the standards to expect and certain guarantees that do not form part of the regulatory requirements.

Question 28

Fig 1.3 - Main Safeguards provided by the ERC rules and Guidance - what are they in summary?

Answer 28

LEGAL ADVICE
NO NEGATIVE EQUITY GUARANTEE
RIGHT TO REMAIN in HOME
PORTABILITY
RIGHT TO PENALTY FREE PAYMENTS

Question 29

1.8 What date have lifetime mortgages been regulated from?

Answer 29

Lifetime Mortgages have been regulated since 31 Oct 2004
Home reversion plans since 6 April 2007

Question 30

1.8.2 - What main factors must a firm take into account when looking at the suitability of a product for a client?

Answer 30

BENEFITS - Will the money affect the clients means tested benefits and tax position. ALTERNATIVE METHODS of RAISING FUNDS - eg Local authority grants. ELIGIBILITY CRITERIA are the customers requirements within the equity release proviers criteria. ESTATE, customers preferences for their estate eg leaving a bequest to their family. LIFE EXPECTANCY and HEALTH. FUTURE PLANS eg will they need to raise more money in the future. FEATURES in the equity release product. PAY FEES or ADD TO THE LOAN.

Question 31

1.8.2 - If the customer is consolidating debts what must be in the suitability letter

Answer 31

Costs associated with increasing the period over the dept will be paid. Securing a previously unsecured loan. If the client has known payment difficulties should they get an arrangment with their creditors or contact Money Helper.