The Conveyancing Committee has been requested to issue guidance in order to assist practitioners when asked to advise on Equity Release Schemes. This Practice Note updates the previous guidelines issued.

In simple terms “Equity release schemes” is a generic name given to a range of financial products offered by financial service providers to homeowners usually over the age of 55 to release money from their property while remaining in their home.

As these schemes are marketed to a certain age category, consumer protection is especially important and all providers in Ireland are required to be regulated by the Central Bank of Ireland. There is a specific register “Retail Credit Firms and Home Reversion Firms Authorised in the State” on the Central Bank website which lists all authorised providers. Authorised providers must therefore comply with all the provisions of the Consumer Protection Code (“CPC”) and consider who are vulnerable customers under the CPC.

1. Product types

The schemes that are generally available on the market can be broadly divided into two groups and, while both schemes allow the borrower to release equity in their home, the terms and conditions applicable vary greatly:

1.1 Lifetime Mortgages

Lifetime mortgages allow the borrower to mortgage an interest in their home, and the borrower continues to own their home. If there is more than one borrower, then they must generally own the property jointly.

The mortgage is paid back upon the happening of any of the following events: the property being sold; the borrower moving out permanently; or after their death. Moving out permanently can include moving into long term care. In the case of joint borrowers, the mortgage is paid back on the second of the borrowers moving out permanently or death. An important point to note here is that some of the lenders may insist upon the mortgage being paid off in circumstances where the borrower moves out, for any reason, for a specified period, and this is discussed later on.

The amount of money that can be borrowed depends upon the age of the borrower and the value of their home. The financial terms of these products should be assessed carefully and the borrowers advised to take independent financial advice.

As interest is typically rolled up, the debt outstanding increases over time (assuming no repayments made). An important consideration here is that the borrower could potentially be left with ‘negative equity’, in circumstances where the increased amount they owe is more than the future value of their home when the loan is repaid. Therefore, it is vital that the borrower receives a ‘no negative equity’ guarantee such that the repayment of the debt will be limited to the future value of the borrower’s home.

The terms of the borrowing should be checked carefully for conditions attaching to early repayment e.g. fees or penalties which may arise. Any such fee or penalty should be in line with a standard mortgage fixed rate early repayment fee.

1.2 Home Reversions

Home Reversions enable the borrower to sell an interest in their home whilst retaining the right to live there during their lifetime. Initial assessment of purchase price is typically market value of the property, less the value of the life interest of the occupant(s) who will occupy the property for their respective lifetimes.

The percentage of the property which the reversion company buys depends upon the homeowner’s age and also the value of the property.

The borrower may either have a fixed-share contract, which means that the percentage of the borrower’s home which is acquired by the reversion company, is fixed from the start and does not change regardless of how long the borrower lives or how much their property is worth in the future. Alternatively, they may have a variable-share contract, which means that the longer they live the less of the property they own. In this scenario, although the borrower may receive a larger lump sum at the time they first sell the interest to the reversion company, the percentage owned by the reversion company increases each year, but the borrower does not get any further funds.

Upon the death of the borrower, the property is sold, and the reversion company will receive their percentage from the sale proceeds.

2. Liability / risks for solicitors

It is important to remember that those clients who become involved with this unfamiliar product will be relying on their solicitor to point out any potential for disaster either in the short or long term, and to reassure them whether, in fact, they are doing the right thing.

Therefore, what is the role and obligation of the solicitor presented with documents for execution and charged with the task of advising the client? Although the answer will depend on the circumstances of each case, it is suggested that the solicitor’s role would include consideration of the following:

2.1 Capacity

This is something which normally arises in the context of making a Will, and the same test would apply to Equity Release Schemes. Do you know your client well enough to assess their ability to manage their own affairs? Are they aware of their assets and liabilities and the names of their next of kin and potential beneficiaries?

When assessing whether your client has the requisite decision making capacity to enter into an Equity Release Scheme, you should consider whether your client understands, at the time the decision is to be made, what it means to enter into an Equity Release Scheme and the consequences of doing so, in the context of the available choices at that time. This is in keeping with the “Functional Test” for assessing mental capacity, as established in the High Court case Fitzpatrick v K [2008], and also legislated for in the Assisted Decision-Making Capacity Act 2015. 

The Decision Support Service has issued a code of Practice for Legal Practitioners on best practice when interacting with a relevant person, their Decision Supporter, the Decision Support services and the courts within the context of the meaning of the ADM Act. There is now a presumption of capacity and Section 3 of the Act sets out the criteria to determine lack of capacity and is a useful guide to help determine capacity. You should determine at the outset of any consultation with the client if he/she has any decision support arrangement in place and if so what type e.g an Independent Advocate, a Co-Decision-Making Agreement, a Court appointed Decision Making Representative. In the event there is no support arrangement in place and there is any doubt about the capacity of the client, a letter should be obtained from the client’s doctor confirming such capacity. The solicitor should consider whether, as matter of course, and based on age, this confirmation should be obtained from the client’s doctor in any event.

A search of the Register of Decision Support Service should also be carried out on receipt of instructions. (Access to the register is not yet available, and email queries should be sent to registersearches@decisionsupportservice.ie)

2.2 The purpose of the finance being raised and alternatives

The solicitor should enquire as to the purpose(s) for which the loan advance is being sought, and take careful note of same, including instructions on what alternatives, if any, have been considered by the client and whether independent financial advice has been sought.

2.3 The risks associated with a Lifetime Mortgage

The solicitor should also discuss in general terms the risks associated with a Lifetime Mortgage which would include the following:

• That the debt will increase over time because of monthly compounding interest. The lender should provide the borrower a schedule to this effect.
• That the future equity in the property (future property value less future debt) will be less or even zero because of the Lifetime Mortgage.
• That taking out a Lifetime Mortgage and receiving cash now may affect the borrower’s ability to fund future needs including health care and emergencies.
• That there may be less or no equity left to their inheritors after the Lifetime Mortgage is repaid.
• That the property may be repossessed if the Lifetime Mortgage is not repaid in accordance with the terms of the loan.
• That if you borrow more than you need now you will pay interest on money you do not need.
• That if you borrow less than you need now, you are not guaranteed to be able to borrow more in the future.

The solicitor should discuss the fact that an equity release scheme, while providing cash now, may limit the options available to the client later in life when it may really be needed, i.e. has the client thought about whether they will have enough money left to fund their care in a nursing home?

With this in mind, the solicitor should make their client aware of the “Fair Deal Scheme” (Nursing Homes Support Scheme). Currently, the HSE accepts applications for the Fair Deal Scheme where there is an existing mortgage in place and accepts that, where a client opts for a Nursing Home Loan to fund their contribution, the HSE charge (which is registered as a burden with respect to the relevant property) will rank behind the first ranking mortgage. Most Lifetime Mortgage providers will allow a second charge to be granted in favour of the HSE to enable a borrower to access the Fair Deal scheme. It is vital that the solicitor check these terms carefully, including (as noted above) requirements for repayment in the event the property becomes vacant.

The solicitor should also enquire regarding any payments client may be in receipt of from the Department of Social Welfare or other government departments and due enquiries carried out as to whether the receipt of a cash lump sum would have any impact on it.

2.4 Undue influence or duress

The question of duress must also be considered. Is there a possibility that the client is under pressure from a child or any other person to raise money for an ill-advised purpose? The standards for solicitors dealing with cases of a possible presumption of undue influence were set out in Carroll v. Carroll (1999) 4 IR 241, which emphasised the necessity for the solicitor to ascertain all relevant facts including details of family members and the client’s relationship with them. Factors which may alert the solicitor’s attention to the possibility of undue influence would be:

• When the client is borrowing money for the benefit of a third party, or to gift to a third party, and there are objective indications of pressure or influence from others (e.g. family members);
• When the client has reduced physical or mental ability;
• When the client is dependent upon family members to look after their financial affairs;
• When there is family division, typically between the client’s adult children; and
• When the client is in an inexplicable rush to complete the transaction.

2.5 The terms of the proposed lifetime mortgage

It is vital that the acting solicitor understands the transaction and recognises what is involved, and it is necessary to read and review the documents presented to the client, as the product terms are continually changing. Therefore, regardless of the product name, it is important to identify the type of product at hand.

It is necessary for the solicitor to explain the terms of the loan, the nature of the mortgage securing the loan, the legal effect of entering into such a transaction, the circumstances in which the loan and the mortgage must be repaid and the obligations on the client to ensure that they do not trigger any event of default.

The client will need to know if there is anything that might interfere with their right to possession of the house during their lifetime. Any such possibility will be set out in the terms of the relevant scheme.

2.6 Valuations

It would be advisable for the solicitor to recommend that the client arrange to have an independent valuation of the property carried out. This assures greater protection for the solicitor as the independent valuer can confirm the valuation of the lender’s valuer.

However, a client might well reject the advice to obtain a second valuation, having already paid for the lender’s valuation, but the client should, at least, be informed by letter that such advice is given. An accurate note should also be kept of any attendance at which such advice is given. As an alternative a record could be kept of comparable property sales as per the Property Price Register (www.propertypriceregister.ie) or currently available on the market.

The potential loss may be even greater if the scheme is a Home Reversion Scheme. In this case, any loss would fall on the client’s estate after their death rather than on the client during their lifetime. In such circumstances, the solicitor should clearly advise having the valuations checked and having the valuation of the life interest checked. If the client rejects the advice, it will be important that the advice be recorded in correspondence and in any attendances on the file.

2.7 Interest rates

In the case of the Lifetime Mortgage Schemes, consideration will clearly have to be given to all aspects relevant to the interest rate: the current interest rate; whether it is fixed or variable; is a redemption fee payable in the case of early redemption? if the rate is variable when can it be varied and by how much? is there a minimum length of time which must expire before it is varied? is there a maximum rate beyond which it will not be increased? if open-ended what criteria will apply to the interest variation? etc. Some of these matters may have different significance depending on whether your client is aged 60 or 80 for example. Independent financial advice on this element will be key.

2.8 The importance of giving independent and proper advice

It was pointed out in the case of Carroll v. Carroll that it is not enough for a solicitor merely to follow their client’s instructions. The solicitor must give advice which takes into account all the relevant circumstances and in circumstances where there can be no conflict of interest.

2.8.1 Independent advice

An important question is whether the solicitor’s advice to the client is independent.

The solicitor should be careful not to advise the client on the terms of documentation in circumstances where the solicitor’s firm has a relationship with the lender, the promoter, or an intermediary who has an interest in ensuring the sale of the product to the client, such that the solicitor’s advice may later be viewed by others as not having been entirely independent, or was given without full disclosure of the nature of any relationship having been made.

The safest rule is for the solicitor to maintain absolute independence.

2.8.2 Social welfare

Advice given to the client will also include advice on what effect the equity release scheme might have on the client’s social welfare benefits. If they are means-related, will the proceeds from the scheme have an effect on the entitlement to receive the benefit? Therefore, solicitors consulted should ensure that their client makes the relevant enquiries with their Social Welfare Office.

In these circumstances, a prudent solicitor would not only advise the client to seek the necessary advice but would defer execution of the documentation until such time as the client advises that they have done so, and of the outcome of such advice.

2.8.3 Tax advice

The solicitor should recommend that clients seek their own taxation advice, unless they have expertise in this area.

2.8.4 Financial advice

The solicitor should, unless appropriately qualified, take care in provision of financial advice, but ensure the client has given appropriate consideration to alternative options as well as the monetary effects of the transaction being undertaken to include e.g. comparing of rates etc

2.8.5 Keeping records of advice

It is essential that proper attendances of all advice are kept and are supported by follow-up correspondence, which should confirm the advice given, and demonstrate that it was given in full knowledge of all the relevant circumstances. Written advice is preferable because an elderly client might well need time to absorb complex advice and be given an opportunity for reflection.

In cases arising from equity release schemes for the elderly, the person to whom the advice was given will also be deceased at the time a claim is brought, and the attendances and correspondence will be of prime importance.

3. Equity Release scheme issues

Practitioners should pay particular attention to the following non-exhaustive list of specific issues which arise in relation to equity release schemes:

3.1 Lifetime Mortgage schemes

3.1.1 Borrower obliged to make a Will

In the past, some lenders require the borrower to make a Will, and the Executor is obliged to sign a Form of Undertaking to co-operate with the lender. Further, the borrowers may be obliged to disclose to the lender the names of their beneficiaries.

3.1.2 Right to call for Repayment of the loan or to Sell the House

Some lenders reserve the right to call for repayment of the loan or to sell the house during the borrower’s lifetime if another lender forecloses on another of the borrower’s properties that is in no way connected with the mortgage.

3.1.3 Ceasing to reside and the lender right to sell the property

In some schemes if the homeowner ceases to reside in the house for a specified period without the consent of the company, then the company may have the right to sell the house. The interaction of this kind of condition with the availability of the Fair Deal Scheme should be carefully considered.

3.2 Home Reversion Schemes

3.2.1 The windfall factor

As already mentioned, under a home reversion scheme the purchaser does not pay the market rate for the interest purchased but pays the market rate less the value of the life interest of the occupant(s). The windfall factor arises because the market value paid for the interest sold is reduced by the value of the life interest of the homeowner to take account of the fact that they would remain in possession for the rest of their life. However, an exorbitant profit may fall to the product provider if the homeowner sells an interest in their home to the product provider and dies shortly afterwards.

However, some of the product providers have introduced schemes to offset this windfall factor and the terms of same should be carefully reviewed. 

3.2.2 Maintenance obligations under Co-Ownership Agreement

Common to this type of scheme is that the borrower is required to enter into a Management Agreement and a Co-Ownership Agreement to ensure that the property is well looked after and includes provisions re. insurance and the right to inspect etc. The Co-Ownership Agreement contains a Pre-Emption Clause, which provides that, should the borrower wish to sell the outstanding interest in the property, the product provider would have first option and, upon exercising this option, it can buy the property at the ‘market price’, which would be defined in the scheme.

4. Family and the loss sustained by the borrower’s estate

A borrower may be encouraged by a lender to discuss the equity release scheme with family members, thus ensuring that any problems are resolved before money changes hands. However, if a client does not wish to involve family members, a cautious solicitor should again ensure that they have proper attendances of all advice on their file.

A further consideration for the solicitor to bear in mind is the impact that a scheme could have on a borrower’s estate, in that monies available for distribution under the estate will be reduced, which means there is potential for family members and beneficiaries to complain later. If a claim is brought against the solicitor for the deceased houseowner by the houseowner’s estate will the claim be successful? It would clearly be dangerous to assume that it would not.

At one time it was thought that a solicitor who was negligent in drawing up a Will could have no liability to beneficiaries who suffered consequent loss. This was changed by the English case of Ross v. Caunters (1979) 2 AER 580 in which it was stated that:

This was followed in the Irish High Court in the case of Wall v. Hegarty (1980) ILRM 124 which related to a claim by a beneficiary who lost a benefit due to a Will having been wrongly executed.

Of course, it might not be possible to identify a beneficiary at the time the house is mortgaged or an interest in it is sold. A number of Wills can be made at different times and different beneficiaries named in each one. This point arose in Ross v. Caunters in which it was stated that: