Could an increase in equity release clients generate a capacity crisis?
Applicants may be more demanding due to larger sums at stake, but legal professionals must ensure their assessment of a client’s mental capacity is up to the mark
Legal professionals may be experiencing more pressure than usual from prospective equity release customers as buoyant house prices and inflation drive record demand.
The desire to release equity from homes has surged in line with rising property prices, and the current fears about inflation – which can have a detrimental effect on those living on fixed incomes – has amplified interest. But all professionals, involved in equity release, both solicitors and brokers, must ensure that only individuals they confidently believe are of sound mind to buy such products, in order to prevent a future crisis.
This is especially true given the higher chances of house prices cooling off after such a prolonged ascent, and due to the increasing likelihood of historically low interest rates finally rising.
It isn’t always easy to discern an individual’s mental capacity, and thus their ability to make a significant financial decision, but, according to the Alzheimer’s Society, 1 in 14 over 65s are suffering from dementia in the UK, so the chances of a client having reduced mental capacity is not insignificant.
This is why all firms involved in equity release must ensure their assessment tools and methodology can stand up to scrutiny.
The coronavirus pandemic unexpectedly bolstered the UK property market. Even after prices slipped marginally in June as the stamp duty holiday came to an end, they remain nearly 9% higher than the same time last year, according to Nationwide, and 13% higher according to Halifax.
As prices have defied gravity, homeowners have seen equity release as an appealing income boost. In total, homeowners released £1.07bn from their homes in the last financial year, 12.8% higher than the comparable prior period in 2019/20.
Many homeowners can secure six-figure sums from their homes, with the average equity release plan hitting £103,710 in the first three months of the year compared to £83,000 for the same period in 2020, according to Key.
Such large amounts of money will be compelling to those eligible to apply for equity release – the 55 and overs – especially as a significant proportion of older workers and retirees have suffered financially during the pandemic
Consequently, this intensifies the onus on legal professionals to confidently ascertain whether applicants can legitimately make the decision to pursue equity release, and that the type of product is suitable.
Many existing mental capacity assessments leave too much scope for subjectivity, meaning the UK equity release market endures a system where one lender’s systems would reject an individual that a rival firm’s would approve.
Clinically-backed technology, such as the Cognitive Assessment Engine developed by Comentis, seeks to modernise and streamline the process, providing legal professionals with a medically robust, objective, and repeatable process.
This is important given the Solicitors Regulatory Authority and the Financial Conduct Authority have upped the pressure on legal firms to identify and support at-risk clients, and this will only increase.
Furthermore, given that drawdown clients could be receiving income from a product years after accepting it, lenders and regulators might want to see mental capacity reviews carried out.
Either way, using a system created by mental health experts and psychologists means legal professionals can be confident they’ve taken the right course of action with any insistent clients, rather than just hoping their decision is correct and potentially storing up issues for the future.
Tim Farmer is Co-founder & Clinical Director at Comentis