Equity Release Horror Stories: What you need to consider

An equity release scheme can seem like a sure way to access funds in or near your retirement age.

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An equity release scheme can seem like a sure way to access funds in or near your retirement age. For the most part, it is an excellent tool that can help you cover medical expenses, buy another property, or help supplement your living costs. However, there are some equity release horror stories that highlight the importance of being informed and educated before making a decision.

What is equity release?

Equity release refers to a range of schemes that allow you to extract value from your property without having to leave it.

There are two main types – lifetime mortgage and home reversion.

Lifetime mortgage

There are various types of lifetime mortgages, but essentially you borrow money against the value of your property. This can be between 15% to 50% of the property value, plus an interest rate. You can either pay the loan and interest monthly or wait until the end of your plan to pay off the loan and interest when you sell your property. The plan typically ends when you either pass away or go into full-time care.

Home reversion

You can sell all or part of your property through a home reversion scheme but retain the right to live there until you pass away. Usually, the value you sell it for is a lot less than the property’s actual market value.

Who can apply for equity release?

To take advantage of equity release, you need to meet specific criteria, including:

  • You must be at least 55-years old for the lifetime mortgage and 65 for the home reversion plan.
  • Your property needs to be worth a specified minimum value.
  • Your property needs to pass the lender’s assessment.
  • You need to release at least £10,000.

There are other requirements for specific schemes, such as the enhanced lifetime mortgage, which you should check with a professional advisor.

What are the benefits of equity release?

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The primary and most apparent benefit of equity release schemes is that they give you instant access to cash. There are no restrictions on how you spend the money, so you could use it to supplement your retirement living costs, cover medical bills if you’re poorly, or help a loved one buy their first property.

  • Due to the wide variety and types available, you’re likely to find an equity release plan that suits your needs.
  • Retain ownership of your property (unless you opt to sell through the home reversion plan).
  • A financial cushion if you find yourself struggling for cash in your retirement.

Equity release horror stories

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There are certain factors regarding equity release that you should consider before making a decision. The opportunity to access a considerable amount of funds is a tempting one. After all, despite being a great way to gain access to money, six out of 10 over-55-year-olds in the UK still won’t consider equity release. You should never rush in before carefully researching the scheme you’re interested in and speaking with an advisor.

Here are some of the most common horror stories that can end up being a nightmare to deal with:

Interest roll-up

Of course, the provider of your equity release plan will charge you interest for the service. This will vary depending on how much you are planning to release. Over time, the size of your mortgage will increase due to the interest compounding over time.

This widow lost a staggering £1mn to an equity release plan linked to her farm property.

Early repayment charge

If you want to exit the plan before it has run its course, you’ll have to pay an early repayment penalty set by the lender. Depending on how far you are into your plan, this charge can sometimes be unreasonable, forcing you to stay within the plan regardless of whether you want to.

Smaller inheritance

If you plan to leave your family and loved ones an inheritance, you should consider whether equity release is suitable for you. Since you’ll have to pay off the loan and interest of your plan after your property is sold, there will be less to leave as an inheritance. Always make sure you are aware of the expenses involved with your plan. If you land a bad rate and take out a considerable loan, your end cost could eat into the majority of the value of your property.

How to avoid equity finance horror stories?

You wouldn’t want to end up like the widow in the story we shared earlier, or this elderly couple back in 2015 who faced a £16,000 early repayment charge on an equity release plan they took out in 2003. There are steps you should take to avoid ending up with your own horror story.

Discuss your options with an advisor

Be sure to talk through equity finance schemes with an advisor and question all the risks involved. Ensure that you use a reputable advisor with a history of helping clients.

Only take out what you need.

The allure of a large lump sum cash injection can be hard to turn down. After all, you could probably achieve a lot, such as going on holiday, covering your living costs, and doing home improvement work. However, you should only release as much as you can pay. The more you choose to borrow, the higher and less favourable the interest rates will be.

Is equity release the right product for you?

Whether equity release is the right product or not depends entirely on your circumstances. If you’re in poor health and need quick access to funds without undergoing a medical, equity release can be a great tool. However, after doing some research, you might find that going through a traditional finance model might be better to obtain a loan.

To stay on top of the interest, you could also opt for an interest-only lifetime mortgage or a voluntary repayment plan. This way, you can access the funds, but you can stop interest from compounds.