Equity Release Horror Stories & How to Avoid Them

Don’t Be a Victim of These Equity Release Horror Stories
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
While Equity Release Is a Fantastic Financial Product, it Can Be a Nightmare if Done Wrong. Don’t become an Equity Release Horror Story Statistic. Here’s How…

Equity Release Horror Stories

While equity release is safer than ever, there are equity release horror stories that are essential to know.

But with 6 out of 10 homeowners considering equity release, how relevant are these equity release horror stories in 2022?

Through this article, you’ll discover:

  • The risks involved with equity release in 2022.
  • How to find a safe equity release scheme.
  • The long-term implications of equity released.

At EveryIvestor, we are constantly keeping our fingers on the equity release pulse, analysing shifts in the industry.

Therefore, while we also bring you positive equity release news, we’re also responsible for looking at equity release horror stories.

We did some detailed research, and this is what we found.

Take a look!

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What is Equity Release?

An equity Release loan is a financial product designed for older homeowners that allows you to unlock the cash tied into your home.

If the youngest applicant is 55 or more, you could release tax-free cash through a lifetime mortgage or home reversion scheme.

The money is available in a cash lump sum, drawdown facility, or through a monthly salary.

The equity release loan, plus compound interest1, is then repaid, usually from the sale of your property, when the last homeowner dies or enters long-term care.

How Do Equity Release Schemes Work?

Equity Release works by allowing you to release cash, remain in your home, and not pay rent for the rest of your life.

Your property works as collateral against the loan.

Types of Equity Release Schemes

There are 2 main types of equity release schemes, a lifetime mortgage and a home reversion scheme.

With a lifetime mortgage, you’ll unlock cash while still retaining ownership of your home.

There are plans available that allow periodic payments of interest and up to 10% of the loan annually to reduce the final amount owed.

With a home reversion plan, you sell all or some of your property below market value, but you can live there rent-free for the rest of your life.

Equity Release Horror Stories in 2022

The last thing you want to be is an equity release prisoner by unlocking cash without giving it much thought.

Therefore, consider these equity release horror stories before making major financial decisions.

However, are equity release horror stories still relevant in 2022? Find out now!

Negative Equity

Equity release was once a dubious financial product, but things look very different when you release equity in May 2022.

Equity release lenders who are members of the Equity Release Council2 offer secured loans that come with a ‘no negative equity guarantee.’

In the past, your family may have been left with a massive bill. However, these days, such equity release horror stories are a thing of the past.

When you release equity with an Equity Release Council member, your family will never pay more than the sale value of your home, even if property prices plummet.

Equity release horror story debunked!

Compound Interest

You can indeed expect compound interest charges3 with equity release.

Your equity release plan can use up all the equity tied into your property without interest payments.

Luckily, compound interest charges can be reduced as many lenders allow interest payments these days.

The equity release interest charged is based on your age, the value of your property, and the condition of your age. The younger you are, the more interest you will pay.

By making payments, you’ll only have to worry about your family covering the cash that’s originally borrowed, instead of the full equity release and the compound interest.

Early Repayment Charges

Some equity release companies will charge high early repayment fees if you end your plan during your lifetime.

An equity release early repayment charge can be anything from 2% to 8% of the equity released, depending on how long you’ve had your equity release plan.

If you want to move from your first property to another, you can move over your loan without paying early repayment charges. This is thanks to a ruling by the Equity Release Council.

Furthermore, due to increased competition in the equity release industry, lenders are becoming vastly more flexible.

You can now find equity release products that waver this fee, have no ERCs for the first few years or remove the ERCs after a few years.

If an early repayment charge is a concern for you, discuss it with your financial advisor.

No Inheritance for Family

Let’s be honest;

If you want to enjoy retirement, it does come with a cost. Equity release indeed reduces the inheritance that your heirs will receive.

Instead of leaving them the full value of your property, you are using the money yourself.

However, there are a few ways to ensure that your heirs will still receive an inheritance:

  • Inheritance protection – a portion of your estate will be secured for your heirs and cannot be touched by the equity release mortgage.
  • You can pay off the interest monthly and up to 10% of the loan annually. This will stop the interest from compounding.
  • While this is a risky option, you can use your equity release plan for home renovations. Excellently finished renovations can increase the sale value of your home, but with market fragility there’s no guarantee.

Equity release horror story debunked!

Equity Release Horror Stories: A Real-World Example

Real-world equity release horror stories do exist.

According to This is Money4, Roy, and Jean Tamplin, from Cardiff, are both in need of care due to poor health.

They ran afoul of an equity release loan trap when they tried to sell their home.

This is because Aviva requires them to pay a £16,000 fine if they wish to move out today. Since 2003, the £43,000 they borrowed has grown to a staggering £119,000.

However, equity release horror stories are mostly a thing of the past!

This couple unlocked cash when interest rates were still extremely high and should have reviewed their equity release plan.

How Do I Know if I Can Trust My Equity Release Lender?

You can trust your equity release lender if they are a member of the Equity Release Council.

The council is designed to safeguard the equity release industry, focusing primarily on the customer.

They were established in 1992, and as a result, the equity industry is now a relatively safe financial product.

If you’ve heard any equity release horror stories in the last 5 years, it’s likely with a lender who’s not a member of the Equity Release Council.

What are the Long-Term Implications of Equity Release?

The long-term implications of equity release products include that it reduces the value of your estate,

Using up the money that’s tied into your property, and your family will usually be obligated to sell your beloved family home.

With a home reversion plan, the bank now owns all or some of the home and will take its portion at the end of the plan, unless your family wants to buy it back.

In the case of a lifetime mortgage, your family can use alternative means to sell your home, if they’re able to do so and want to keep the property.

Can I Sell My House if I Have an Equity Release Loan?

If you’ve released cash and now want to sell your current property, you can do so and transfer your mortgage to a new property.

However, if you sell up to move to another country or move in with family members, you may incur early repayment charges.

High early repayment charges are one of the equity release horror stories you’ll want to avoid!

Is There a Better Alternative to Equity Release?

If an equity release product isn’t right for you, there are better alternatives to equity release.

However, in some cases, equity release is a fantastic choice.

Your equity release advisor will help you discover if unlocking cash through one of these products is the right option.

Here are some equity release alternatives:

  • A short-term lending facility might be an option for extra cash, but you’ll need to compare interest rates, and with such loans, you’ll be obligated to make monthly repayments.
  • Downsizing by moving to a smaller or cheaper home will help you free up some cash.
  • A retirement interest-only mortgage is another later-life mortgage option to consider.
  • You can reduce your expenses and rely on your means-tested benefits or a private pension5.

In Conclusion

While equity release horror stories have happened in the past, equity release is safer than it’s ever been in 2022.

If you seek the right financial advice, look at all your alternatives, and use a leading lender, then equity release could be the best decision of your life.

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