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Equity Release Horror Stories – What to Avoid

Equity Release Horror Stories

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

When you are considering a lifetime mortgage or other equity release plan, it’s normal to want to hear about equity release horror stories so you can avoid the same pitfalls. 

In this guide, we address the basics of equity release before relaying some equity release horror stories found online. We’ll even tell you how to avoid the same situations so you don’t have your own equity release horror story to tell.

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What is equity release?

Equity release is a method of releasing some of the value of your home as a cash lump sum or drawdown, exclusively available to senior homeowners. You can release the funds in one large sum, multiple smaller instalments, or a combination of both. You can read in detail here about how equity release works.

Repayments on the money received (and possible interest) are not required and the total debt is only repaid through the sale of the property in the future. You will be made to sell the house if you move into long-term care, otherwise, it is repaid from your estate after death.

A detailed explanation of equity release schemes

There are two main ways of releasing equity in the UK, although one is much more popular than the other. 

The most common equity release plan is a lifetime mortgage. This is when you agree to release a percentage of equity in your home based on the current value of the property. This money is charged with a fixed interest rate that rolls up, meaning it accumulates and adds to the total money owed rather than being repaid each month. Even with standard interest charged at around £60,000, the total debt can double in a decade. However, some people make voluntary interest payments to keep their debt lower, and so they pass on more inheritance when they die. 

You can also find enhanced lifetime mortgages. These are designed to help people with a shorter life expectancy to access more of their home equity to pay for private care. 

The second way to take out equity as a senior is through a home reversion plan. Essentially, this is when the homeowner trades in a percentage of their home’s future sale proceeds for a much smaller amount of equity, but no interest is charged. For example, you may have a home worth £200,000 and take out 20% equity (£40,000) but have to give up 50% of the property’s eventual sale proceeds, which could be +/- £100,000.

How much equity could I release?

If you qualify, the amount of equity you can release is typically between 20% and 60% of the price of the property. This varies from person to person and is determined by a variety of criteria, including the value of your property and your age. When providers determine your figure, they consider two factors:

  • How much your home is worth – your equity release provider will arrange for a professional valuation of your home.
  • Based on your age and health, how long you’re likely to live after taking out your plan. If it’s a joint application, the youngest applicant’s age and health will be considered.

Providers would often consider the following aspects when determining how much equity you can release:

  • The materials used in the construction of the property, as well as whether or not it is a listed structure.
  • Property condition
  • Debt secured by your home, such as a revolving credit card balance or an existing mortgage (this will need to be paid off first)

What are the pros and cons of equity release?

So, should you take out an equity release scheme or is it a bad idea? The answer depends on personal circumstances. Equity release products can be exceptionally beneficial to make retirement more comfortable, paying for private care, home improvements and even cruises. 

The primary drawback of equity release is that it does not give you the full market value for your home. Compared to the amount you would earn if you sold your home on the open market, you will receive significantly less money — although, of course, in that case, you would still have to find a new place to live.

Who are the Equity Release Council?

The Equity Release Council (ERC), which was founded in 1991 and is backed by the UK’s top equity release providers, is a non-profit organisation. It was established to promote safe equity release products and to protect homeowners’ interests. As a member, the organisation must conform to the group’s rules and guidelines, which have been created to protect the homeowner and ensure good industry practices.

For example, companies that provide equity release products and are members of the ERC must guarantee that the homeowner will never be asked to leave their property. And they must also guarantee that the homeowner(s) will never owe more than the eventual sale proceeds of their home, even if their debt has grown bigger than their home value due to rolling interest. This is called the negative equity guarantee. 

These are just some of the many benefits of choosing a lender that is a member of the ERC. If you don’t choose a legal lender and a lender that is a member of the ERC, you could be telling one of the many equity release horror stories… 

Real equity release horror stories

Horror story #1

“Avoid equity release like the plague. As power of attorney for my parents I have to manage two long term care packages whilst the equity release company strips away asset value at an alarming rate (£15,000 interest next year). After working for 30 years I have had to sell my own house to support my Mum. I have to maintain their house at great cost – essentially I am working for the lender. It is a depressing nightmare.”

[YouTube comment from an equity release video by Which?]

In this instance, it sounds as though the poster is unhappy at the severe cost of the equity release plan the homeowner has taken out, which is a common complaint. This has transpired into having to use his/her own money to help their parents in later life. 

Horror story #2

“My parents used a SHIP registered equity release scheme (they are elderly) and, basically they had to sell about 75% of their property for around 33% of its value […] Now, every year, they have to put up with an inspection from the company who send a representative to go over the house and make a report. This year’s report contained a criticism that the bathroom was “in need of updating” (it has a coloured bathroom suite – not the “desirable” white), so I think I can see where this is leading, they are probably expecting my parents to carry out a certain level of house maintenance/refurbishment at their own expense.”

[Money Saving Expert Forum from Mrs_Money]

In this post, the poster is also complaining about the cost of equity release. But they are also unhappy with the inspections carried out by the company and the expected demands of property refurbishment. The ERC guards against unnecessary maintenance. 

Horror story #3

Roy, a retired accounts manager, says: ‘It was a bolt from the blue, which has stung us horribly — it’s a scandal. There was no explanation at the time of any kind of exit fee, or that it would cost a fortune.’ Roy and Jean, now both 83, had released cash from the equity in their home because they wanted to buy a boat to enjoy in their retirement. They bought a 29ft Rodman motor cruiser and christened it Rob Roy. In 2008, they sold the boat — and, later that year, moved house, taking the equity-release loan with them. 

Then, in March last year, they decided to move into sheltered accommodation. It was then that they discovered they would have to pay £119,391 in debt plus the penalty fee of £16,430. Although the value of their property had increased to £249,000, they were left with just £113,179. 

[This Is Money Story about Roy and Jean Tamplin]

Should I let equity release horror stories put me off?

You should not let equity release horror stories put you off considering a lifetime mortgage or other plan, but you should be aware of them and the pitfalls. The fact you already found this guide suggests you are being diligent about your research and taking the time to learn more. They are also another reason to only look for legitimate lenders that are members of the ERC. 

If you have any concerns, always raise them with your equity release adviser. Getting advice is mandatory as part of the process.

The benefits of releasing equity

The main benefits of equity release are:

  1. Lump-sum of tax-free money.
  2. Keep living in your own home.
  3. Protect a part of your home’s value for your family.
  4. There isn’t a monthly payment plan.
  5. Repay if you want.
  6. Include a cash reserve option.
  7. Maintain full ownership of your home.
  8. Get what you want out of life with the money you have.
  9. Depending on the lender’s conditions, you may be able to move in the future.
  10. Rates are fixed for life.
  11. There is a cashback option available.
  12. Pay off your regular mortgage
equity release horror stories

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What are the drawbacks of equity release?

The overriding disadvantage of equity release is that it is expensive. Whether you opt for a lifetime mortgage or a home reversion scheme, the overall amount you pay back can be double or even all of the property value. This significantly affects the value of the inheritance you pass on. 

Some other cons of equity release are:

  1. It’s hard to get out because of high early repayment fees
  2. It can boost your savings and make you ineligible for some means-tested benefits
  3. Your debt is increased by interest
  4. Being an equity release prisoner might lead to a far worse nightmare because you won’t be able to arrange any wealth to leave as an inheritance to your family.
  5. You might be subjected to early exit fees
  6. You might not be able to leave your home as an inheritance
  7. You have to pay set up fees
  8. You won’t be able to take out another loan against your house

Can you lose your home with equity release?

When you have a plan from an ERC member, you can never be asked to leave your home or sell the property out of the blue. The only time you must sell is if you move into long-term care. However, there are a few reasons why you may be forced to sell the property and leave early. These are

  1. You lied on your application to get the lifetime mortgage
  2. You are not really living in the property (for at least six months)
  3. You are letting the property fall into serious disrepair which could significantly devalue the property and make it hard for the lender to sell

Can I sell my house if I have an equity release?

If you have an equity release plan and want to sell your home and move to a new property, you should be allowed to do so. The Equity Release Council states that its members must allow homeowners to move to a suitable alternative property. This means the new property should be of equal or higher value and must be just as easy for the equity release lender to sell on an open market. Unique properties may not be as easy to sell, such as boathouses or properties in remote areas. 

But what about downsizing? Moving to a smaller and more manageable property is a common scenario for those in retirement. If you have a downsizing clause within your agreement, you should be allowed to downsize and pay off the portion of your equity release plan required. The clause should prevent you from having to pay expensive early repayment charges. It’s important to tell your equity release adviser if you plan on downsizing in the future so they can get this clause in your contract.

Do you pay tax on equity release?

It is excluded from Income Tax because it is not a type of income; rather, it is a loan, similar to a home mortgage, and therefore is not taxable.

No taxes are levied against you if you plan to use your equity release to supplement your income in any way.

What are the pitfalls in equity release?

The pitfalls of equity release are not doing the research and fully understanding what will happen and not getting the right type of financial advice. You should seek out advisers that specialise in equity release. 

As just mentioned, another potential pitfall is not telling the adviser about future plans, such as downsizing.

Is equity release a scam?

Equity release products from companies that are regulated by the FCA and members of the ERC are not a scam – but they can still be expensive. Equity release is a totally legal scheme that can allow those over 55 access the wealth locked up in their properties as a tax-free lump payment or a recurring income when done properly with the right guidance and through a reputable company.

Some people think of them as a con due to how expensive they can become. But at the same time, the negative equity guarantee – when applicable – stops you from ever owing more than what your home sells for.

What is Compound Interest?

Taking on equity release programmes that have compound interest rates 5 tied to them is a significant mistake that many people make, and it may result in your debt doubling or even tripling across years if you aren’t careful. Compound interest means that the amount of money you owe will keep growing as time goes on. This means that you will have to pay more money each month and get less money back because less equity is being taken out for each payment into the scheme.

What is the truth about equity release?

The truth is that equity release can be an effective and sensible way to fund retirement, but that doesn’t mean it is for everyone. The decision usually comes down to inheritance and the beneficiaries in line to receive the estate. Do they need the money? Are they already wealthy and set up? Or are they reliant on inheriting the property in the future for their own financial stability? 

Start learning more about equity release!

For more information on anything to do with lifetime mortgages and home reversion plans, check out the other guides and posts with us at MoneyNerd. We’ve been busy writing scores of new equity release guides and answering your most asked questions. They’re 100% free and easy to follow! 

Still not 100% clear?

Chat to a professional online lawyer about your case

Grab a £5, week-long trial to get the best advice on your case.

Once you’ve got your answers, just cancel the service. 

 

That’s £50 of legal advice for £5!

Chat to an online lawyer now

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