Equity Release Horror Stories
Equity release has its share of cautionary tales, but many of these are rooted in past practices that have since been reformed. The landscape has significantly improved thanks to new regulations, better products, and mandatory independent legal advice, offering reassurance to prospective users.
UK homeowners borrowed £699 million in the first quarter of 2023 alone
Equity release is a powerful financial tool that allows homeowners to unlock the value of their property, providing financial flexibility in retirement.
Improved regulations and products and mandatory independent legal advice have led to a positive shift in the industry. Nonetheless, headlines like “Why are families forced out as equity release firms make a killing?” highlight the importance of approaching equity release with caution and awareness.
Understanding the risks
Problems with equity release often arise from misunderstandings about loan compounding, high interest rates, and impacts on inheritance.
This guide explores four notable equity release horror stories and how to avoid them, emphasising the need for a thorough understanding and consultation with a qualified financial adviser.
How does equity release work?
Equity release is available to homeowners over 55 who want to cash out on their property’s equity without moving.
There are two main options.
You can read our guide here to learn more about how equity release works.
Common themes in equity release horror stories
Equity release horror stories often include unexpected debt accumulation, loss of inheritance rights, and difficulties changing terms.
- Unexpected debts. High-interest contracts can lead to debts exceeding the property’s value, burdening heirs who might have to sell the family home to cover these liabilities.
- Unscrupulous lenders. Some lenders pressure homeowners into releasing equity under unfavourable terms, providing far less than the property’s actual value.
- Impact on state benefits. Homeowners might not realise that equity release can affect their eligibility for state benefits, potentially leading to financial difficulties.
Avoiding these pitfalls
To avoid these issues, seek professional advice and understand the implications before proceeding with equity release.
The legacy of past equity release schemes
Equity release schemes from over 30 years ago were vastly different from today’s regulated and safer options. Many horror stories from that era involve unscrupulous lenders exploiting unregulated plans, tarnishing the market’s reputation.
A notable scandal in the late 1980s
A major scandal in the late 1980s severely damaged the fledgling industry. Many elderly homeowners were sold investment-linked home income plans to enhance their retirement finances.
These plans collapsed in the early 1990s when interest rates soared, stock markets plummeted, and house prices fell, leaving many with crippling debts.
Aftermath and reforms
The Financial Services Compensation Scheme awarded compensation to affected customers, and significant regulatory changes were implemented to ensure the safety and fairness of equity release plans.
Today’s equity release plans are fully regulated by the Financial Conduct Authority (FCA) and supported by the Equity Release Council, which provides additional safeguards such as the no-negative equity guarantee.
Recent equity release horror stories
Equity release horror stories that have recently emerged are essential if you consider this type of loan.
Horror story 1. The exorbitant exit penalty
Source: thisismoney.co.uk
A couple had taken out an equity release lifetime mortgage of £384,000 in 2008. In 2013, Jane’s husband, David, passed away. After eight more years, Jane decided to sell the farm to downsize.
However, she faced over £500,000 in interest costs and a £96,000 early repayment charge.
Modern protections like the significant life event exemption and downsizing protection, which could have saved Jane £96,000, were unavailable to her.
- Significant life event exemption. Allows repayment without an Early Repayment Charge if one borrower passes away or moves into long-term care.
- Downsizing protection. After holding the plan for five years, repayment is allowed without an Early Repayment Charge.
Jane’s Early Repayment Charge (ERC) was 25% of the initial amount borrowed. Modern equity release plans typically have fixed ERCs, capping at 10% and decreasing over time, which would have mitigated Jane’s financial burden.
Horror story 2. The steep repayment cost
Source: thisismoney.co.uk
Roy and Jean took out a £43,000 equity release in 2003, which grew to £119,000. When Roy’s health deteriorated, and Jean struggled with her eyesight, they decided to sell their home and move into sheltered accommodation.
This decision triggered a £16,430 ERC because only Roy was deemed to require long-term care.
- Modern solutions. The Significant Life Event Exemption could have waived the ERC, and overpayments on modern plans could have helped them manage their debt better.
Horror story 3. Shared appreciation mortgages
Source: The Guardian
John’s case involved a Shared Appreciation Mortgage (SAM), where he received a lump sum without interest, but the lender took a 75% share of the property’s appreciation.
Popular in 1996 and 1997, such deals led to substantial repayments as property values soared.
These plans are no longer available, but more transparent and regulated options have replaced them.
Horror story 4. Missing man
Source: The Telegraph
Ernest Mackie was last seen in 2011 and is presumed dead. His son discovered that Ernest had taken out a lifetime mortgage, which grew from £62,000 to £142,500.
Mr Mackie decided to repay the loan, facing a £22,000 early repayment charge (ERC).
Modern plans, with fixed ERC structures and significant life event exemptions, would have likely waived the fee under such circumstances.
Equity release video
Watch the video below to see what MoneyNerd has to say about the ‘Dark Side of Equity Release’:
Mis-sold equity release
Previously, some financial advisers mis-sold equity releases, leading to several issues.
- Unnecessary recommendations. Advising equity release when it wasn’t needed.
- Better alternatives ignored. Failing to recommend more suitable options.
- Inappropriate product recommendations. Suggesting a less suitable product when a better one was available.
Regulation improvements
Equity release became fully regulated on April 6, 2007, initially by the Financial Services Authority (FSA) and later by the Financial Conduct Authority (FCA) in 2012.
The Equity Release Council was established to ensure its members act in customers’ best interests and provide additional safeguards like the no-negative equity guarantee.
Risks and pitfalls of equity release plans
Equity release plans come with several risks and pitfalls that require careful consideration.
- Accumulating compound interest. The interest on an equity release loan compounds over time, significantly increasing the total amount owed.
- Negative equity. The debt could exceed the value of your home, but many modern plans offer a No Negative Equity Guarantee.
- Impact on means-tested benefits. Funds from an equity release plan can affect your eligibility for means-tested benefits.
Carefully evaluating these risks and consulting with a qualified financial adviser can help determine whether an equity release plan is appropriate for your situation.
Early repayment charges
Early repayment charges (ERCs) can significantly increase the cost for those wishing to repay their plans early. Many lenders impose these fees if you decide to repay your loan before its intended term.
Good news
A new Equity Release Council product standard requires all new lifetime mortgages to include the option of making partial penalty-free repayments up to a certain percentage. This provides more flexibility and reduces the potential financial burden of early repayment.
How does equity release affect inheritance?
Equity release often impacts inheritance, reducing or even eliminating the family legacy, which can cause financial strain for beneficiaries.
Why does this happen?
Equity release loans are typically repaid by selling your house once you pass away or move into permanent care. If the loan amount equals the value of your home, nothing will be left for your heirs.
Inheritance protection
To avoid this scenario, you could opt for a plan that includes inheritance protection, ensuring that a certain amount of equity is safeguarded for your heirs.
Should equity release horror stories deter you?
Equity release horror stories shouldn’t deter you; they provide valuable lessons. While there are potential pitfalls, equity release also offers several benefits.
For many retirees, it provides financial flexibility, allows them to maintain homeownership, and offers a tax-free lump sum or drawdown facility.
Understanding these benefits and weighing them against the potential risks is crucial.
How to avoid becoming an equity release horror story
To avoid becoming an equity release horror story, consult a qualified adviser and only borrow what you truly need.
- Discuss options with an adviser. Ensure you make well-informed decisions that align with your financial goals.
- Borrow only what you need. Minimise debt accumulation and maintain better financial stability.
- Protect Yourself from Scams. Choose providers who are members of the Equity Release Council and regulated by the Financial Conduct Authority (FCA).
By following these guidelines and making informed decisions, you can avoid becoming an equity release horror story and ensure a more secure financial future.
Things you need to know about Equity Release
Equity release can offer a way to access extra funds without leaving your home, but it’s not without drawbacks. Here are some reasons why it might not be the best choice for everyone.
- Cost. Equity release can be more expensive than a regular mortgage. With a lifetime mortgage, you’ll typically face higher interest rates, and the interest can compound over time, increasing your debt.
- No fixed term. Lifetime mortgages usually don’t have a fixed repayment term. The interest rate remains constant throughout the contract, and any additional borrowing may have varying interest rates, potentially affecting your overall debt.
- Home valuation. Home reversion plans may not offer the total market value of your property since you’re allowed to remain in your home for life. This means you might receive less than if you sell your property on the open market.
- Future financial needs. Releasing equity from your home could limit your ability to use the property’s value for future financial needs, such as long-term care expenses.
- Downsizing challenges. While you can move home and transfer your lifetime mortgage, downsizing may not be feasible if you don’t have enough equity to cover the mortgage repayment.
- Impact on benefits. Receiving money from equity release could affect your eligibility for state benefits, potentially reducing your overall income.
- Arrangement fees. Equity release often involves arrangement fees ranging from £1,500 to £3,000 depending on the plan, adding to the overall cost.
- Inheritance. If you opt for an interest roll-up lifetime mortgage, there may be less to pass on to your family as inheritance, as the debt accumulates over time.
- Complexity. Equity release schemes can be intricate to unwind if you change your mind, requiring careful consideration and professional advice.
- Early repayment charges. Changing your mind about equity release may incur early repayment charges, although these are typically waived in the event of death or moving into long-term care.
- Impact on inheritance. Equity release can impact the inheritance you leave to your family members, potentially leading to conflicts or complications. Open communication with your family is crucial to address any concerns or expectations.
Considering these factors alongside your circumstances and financial goals is essential when evaluating whether equity release is the right option for you.
Remember, there are alternatives to equity release.
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