Equity release schemes hit their peak in 2007 but the market is currently going through another burst of increased activity. The amount taken out in equity release reached £230m in the first three months of 2013 and consumers are taking larger amounts than ever before.
It is easy to see the attraction of legitimate schemes to asset-rich, cash-poor retirees; able to make use of the equity in their property whilst remaining in their home until their death. However, the legalities are complex and equity release schemes must be structured correctly by regulated operators to qualify as such.
Poorly structured, unregulated arrangements that have the appearance of equity release schemes may leave individuals, professional advisers and operators open to allegations of mortgage fraud if they go wrong leaving lenders out of pocket.
Regulated equity release schemes
There are basically two types of regulated equity release scheme. A ‘lifetime mortgage’ scheme allows the mortgagee to take a loan on their property and either withdraw it as a lump sum, as regular payments or as required, but making no repayments whilst they are still alive. The debt and interest is taken from their estate on their death.
‘Home reversion’ schemes are a less common alternative. The individual sells all or part of their home in return for a regular income and the right to remain in their home until their death.
Lifetime mortgage schemes have been regulated by the Financial Conduct Authority (formerly the FSA) since 2004 and home reversion schemes since 2007. This has significantly reduced the risk of fraud.
Equity release frauds
Despite the emergence of regulated equity release schemes, allegations of fraud still occur in relation to illegitimate schemes or unregulated arrangements that have the appearance of equity release schemes.
These ‘equity release’ frauds typically involve a home owner innocently selling their property to an unregulated person or company, thinking that they are entering into a genuine equity release plan. The operator will then obtain a mortgage on the property, often at an inflated property value. A fraudulent operator may then disappear with those mortgage funds, leaving the mortgage unpaid and the original home owner without an income.
Ultimately, the bank may repossess the property to repay the mortgage debt, leaving the original home owner with few rights. The occupant is then legally a mere tenant in their own property, subject to eviction by the bank.
The increased popularity of equity release products provides opportunities for unregulated and illegitimate arrangements to proliferate. While some of these arrangements are illegal per se, other arrangements that have the appearance of equity release schemes may not be fraudulent even if they go wrong.
Who can get caught up in equity release frauds?
Individuals and operators participating in property-related financial arrangements that collapse may be accused of being complicit in a scheme to defraud lenders if the lender is left out of pocket. The fallout may also see professional advisers facing allegations of mortgage fraud, particularly if there are suggestions of overvaluation.
However, complex financial arrangements can and do collapse sometimes leaving lenders with a shortfall. Allegations of mortgage fraud may follow but arrangements can be entirely innocent or innocent parties can get caught up unwittingly. Anyone facing allegations of mortgage fraud should seek immediate legal advice, contact our specialist solicitors on 01616 966 229 today for more information, you can also complete our online enquiry form and a member of the team will contact you directly.