As more and more people are considering equity release to fund their retirement, there has been an increased interest in how it works.
One of the most common questions is ‘what happens if my equity release company goes bust’? Luckily for you, this article will answer your questions about the potential risks of investing in equity release products.
Check it out!
What Happens if Your Equity Release Lender Stops Trading?
Some equity release companies have been trading for many years, but others are newer to the market. It would be best if you asked your lender what their track record is, and how long they’ve been trading so you can make an informed decision about which company to go with.
However, if your lender stops trading, there may be no way of recouping your funds. There may even be clauses1 in the contract that can see you locked into using them even after they have stopped trading.
To avoid this situation, make sure your equity release agreement has no ‘tie-in clause’2 and doesn’t state anything about being committed to using their life services or even just as long as they trade.
Another thing to keep an eye on is any penalties involved with not completing your mortgage term. If it’s stated in your equity release plan, then you need to think carefully before swapping providers, which could end up costing you more than staying put!
Ensuring Your Safety
If you’re a homeowner with equity tied up in your property, you must use a licensed lender to release your funds. You must work with a provider who is a member of the Equity Release Council3.
This means that if something happens to them – for example, they go bust or get into financial difficulties due to poor management – a prudent investor will bail them out without any impact on customers like yourself.
In other words, you have nothing to worry about because all lenders must provide this protection by law4. It stops borrowers from being stuck with contracts that could otherwise see them locked into using their current providers even after they stop trading.
So make sure you don’t make the mistake of signing up to a company that doesn’t have this license.
Suppose you’re worried about losing your home. In that case, there’s no need because most equity release products allow borrowers to terminate their agreements before they’ve spent all of their capital if certain significant life events happen – like retirement or terminal illness. This means that any money left after these circumstances are met will be refunded in full and not just as an annuity5 with interest payments for the rest of someone’s life.
Securing Your Home
The first thing to do is check the company’s license. If they hold a credit license, then your house will be safe if they go under. This may seem obvious, but it’s not uncommon for unscrupulous companies to take advantage of people in this situation and try to sell them complicated investments that are difficult or impossible to get out of.
Don’t sign up with a lender who doesn’t have this crucial protection!
4 Options for Homeowners When the Lender Goes Bust
If the lender does happen to close down, there are still options open for homeowners- here’s what would happen:
- The lender would have to give you back your ‘loan repayments’ (the money that’s been taken out of your home).
- If the value of your house has gone up, they need to make sure this is clear in the contract and provide you with a fair valuation6 before taking any money for themselves. This will be at least as much as it was worth when they started taking payments from you.
- All promises made by the lender must be honored even if they close down. Any disputes should go through an independent arbitrator who can ensure fairness on both sides.
- Finally, if the company does go bust, the regulator will make sure you get your money back.
3 Organisations Your Lender Should Be a Member Of
You should always check that the equity release provider is regulated by a reputable body with strict rules on how they treat customers and their money. This is usually through membership of one of two organisations:
- The Financial Conduct Authority7 (FCA)
- The Council for Mortgage Lenders8 (CML)
- The Equity Release Council
Any regulated lenders will be clear about being a member of the Equity Release Council on their website.
Learn all about: The Best Equity Release Providers in 2021
What Happens if Your Equity Release Lender Stops Lending and You Need Additional Funds?
Once your present lender has gone bust, your new lender will continue the plan as is, and it will run until you pass away or move into permanent care. In other words, the rules stay the same.
You will only be able to borrow additional funds if there is still money available to release from your home.
Alternatively, you can look at equity release alternatives to try find additional funds.
What Happens if Your Equity Release Adviser Stops Trading?
Your equity release adviser may stop trading for several reasons. If this happens, your guarantor will need to take action and find another company to manage the mortgage on their property.
It’s worth noting that if you released some funds from an equity release plan, then these would be lost. However, many lenders have clauses in place to allow someone else to purchase out the equity release plan and refund it.
Sometimes, the equity release company may not have enough money to pay out a lifetime mortgage income stream, leading them to become insolvent.
The guarantor9 will then need to find another equity release adviser who can manage their property’s lease agreement with the new lender, or they’ll need to carry on paying for all of these costs themselves. This is unlikely given that most people use an equity release scheme as part of their retirement planning.
In many cases, this would mean having cash available to fund your living expenses until you sell your property at some point in the future when you’re ready for residential care.
Who Do I Need to Notify if My Equity Release Advisor Has Gone Bankrupt or Ceased Trading?
If you think that your equity release company has gone bankrupt, then you’ll need to contact the Financial Conduct Authority.
What Happens to the Property That Was Released When Your Company Goes Bust?
When a company goes bust, your release provider’s assets may be transferred to another equity release lender. The firm will want some time to review your financial situation, and they’ll assess what’s best for you based on their guidelines.
How Can I Tell if My Equity Release Company Is Insolvent?
To know if your equity release company is insolvent, you need to check the following:
- The financial health of your equity release provider, including checking profit and loss accounts.
- How long they’ve been in business by looking at their website or contacting them for a copy of their certificate of incorporation.
- Is it listed on any reputable databases?
If the Worst Happens, What Are the Steps That Can Be Taken to Make It Easier For My Family Members and Me?
If the worst happens, and your equity release company goes bust:
- You will need to work with a licensed insolvency practitioner who can guide you through the process.
- The administrator of an estate would contact you for information about any investments attached to your property to recover some money.
- Your family might be able to claim compensation from the government if they were also affected by this incident.
What Happens if I Can't Find a New Lender to Cover the Cost of Managing My Property's Lease Agreement?
You would need to find a new equity release provider, but this might not be possible if the market is flooded with people who are all looking for a mortgage like yours.
Your family members may have to cover your monthly installments until you can find another lender or some other solution – take care of them in case they end up having to do so!
The Equity Release Council regulates the equity release industry, so if your company goes bust, your plan will generally be passed on to a new lender.
However, it’s always worth checking how much protection is in place when signing up for an equity release deal and ensuring that any guarantees are ‘transferable’ or passed on to a new provider.
It may also be worthwhile looking into other ways of securing long-term peace of mind with a pension annuity rather than relying solely on an equity release plan.