Equity Release and Mental Capacity Considerations

As people live longer and want to maintain a certain lifestyle coupled with soaring house prices and low interest rates, we have seen a rise in the demand for equity release. Many retired people struggle due to restricted cash flow, yet live in valuable homes.

There are many obvious advantages to equity release; you carry on living in your own home, your monthly outgoings will not increase, and you can spend the money however you like. There are also other considerations to releasing equity that must be considered before signing the contract. The interest charges are different to that of a mortgage or loan. A person’s family in all likelihood will get a smaller inheritance when the person dies. Furthermore receiving an equity payment may reduce a person’s entitlement to some means-tested state benefits.

The average age of an equity release customer is 72 (Louise Overton, University of Birmingham For Age UK, June 2010). Government guidelines state that our health needs potentially increase after the age of 65. This coupled with a long cultural tradition in this country of parents leaving an inheritance to their children means that some children may not receive the inheritance they expected. Does this mean we will soon start to see challenges to equity release contracts? Children of the now deceased, may claim that their parents signed the contracts when they did not understand the terms.

The recent PPI scandal highlights the greater scrutiny being placed on the financial sector, its conduct and processes when selling financial products. Class actions and ‘no-win no-fee’ services have also made it easier for people to challenge companies on the grounds of mis-selling. Furthermore the news that MPs and the FCA are looking into the treatment and definition of vulnerable clients, helps to ensure the industry remains as transparent as possible.

How to protect the seller and buyer using the principles of the Mental Capacity Act

The principle of understanding, retaining, weighing up information to make an informed decision and communicating their decision would take away any ambiguity further down the line that the person taking out the equity at the time did not fully understood what they were doing.

Understanding the MCA and educating all staff in vulnerable clients is an essential first step in creating a culture and awareness of mental capacity. Increasingly we are being contacted by reputable, conscientious companies requesting mental capacity assessments for vulnerable clients.

TSF are able to provide both training in the MCA and expert mental capacity assessments. We are independent of the financial and insurance sector and provide robust assessments with accompanying documents stating our conclusion.

What our reports provide is the removal of any doubt around the capacity of the person to take out the equity release policy. Due to the clear, considered and independently verified evidence collated during the assessment any capacity based challenges made in the future can be refuted.

Let’s hope the momentum for improving the protection of vulnerable clients continues. Contact the team with any questions or queries about assessing mental capacity in relation to equity release, or call 0333 577 7020.