Equity Release Horror Stories
Equity release is a trending topic amongst UK retirees at the moment. But if you’re not careful, that lifelong dream of financial freedom could turn into a nightmare.
With equity release lending reaching a record high of £4.8bn in 2021, there are bound to be some bad experiences.
As experts in our field, we discuss the following in this article:
Our equity release experts have scoured the financial news and tapped into all of our resources to bring you the latest on equity release, including the horror stories.
We aim to provide you with all the information you need, good and bad, to make the best financial decisions for your future.
Let’s get started!
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Equity Release Horror Stories: What You Need to Consider
Equity release schemes can provide an economic lifeline in your retirement.
Whether you’re looking to supplement your day-to-day living or want to splurge on a dream holiday, equity release can often be the best solution.
Sometimes, however, things go wrong.
Here are some of the most common equity release horror stories that have caught people out.
Negative equity is not a problem if you unlock cash through a member of the Equity Release Council.
You’ve released a tax-free lump sum from your home, and you don’t have to pay any of it back in your lifetime. It sounds great, doesn’t it?
The problem comes when your loan, plus the interest, exceeds the property’s value against which you borrowed.
Why’s this a problem?
When you pass away or have no choice but to move into permanent care, your home is sold to pay back your loan. With negative equity, your estate could be required to pay back a lot more than what your home is actually worth.
The good news is that the Equity Release Council1 requires all of its members’ products to include a “no negative equity guarantee”.
This guarantee means that your estate will never owe more than what your home is worth when sold.
To ensure that this guarantee covers you, only consider borrowing from members of the Equity Release Council.
Debts That Double with Compound Interest
If you don’t pay it off, your equity release debt could possibly double, especially if you unlock a plan when you’re younger.
That being said, one of the key drawcards of equity release is that you don’t have to make any monthly repayments.
The downside is that interest on your loan rolls over and compounds.
What does that mean?
Compound interest2 is calculated on the principal loan plus all the interest that has been accumulated from previous months.
Therefore, the amount of interest increases every month, and before you know it, your debt could double.
It’s important to discuss a plan of action with your equity release adviser to avoid this from happening.
Some options to consider would be securing a fixed interest rate or making interest-only payments every month.
Early Repayment Charges
Many lenders will apply early repayment charges or penalties if you choose to pay off or end your plan before it’s due.
The amount you’ll be charged depends on how long you’ve had your plan but generally varies between 2% to 9% of the initial equity released.
Why do lenders implement these penalty fees?
These fees are used to discourage equity release borrowers from paying off too much of their loan, thus reducing the interest the lenders can charge overall.
Luckily, with the competition heating up in the equity release realm, lenders are becoming much more flexible with early repayments and the fees they attach to them.
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No Inheritance for Your Family
One of the primary considerations when looking into equity release is whether you plan on leaving an inheritance behind for your family or not.
Equity release plans are paid off by selling your house once you die or move into permanent care.
Suppose your property is to form most of the inheritance you plan on leaving behind. In that case, equity release isn’t likely an option that’ll work for you.
Unfortunately, in the past, some retirees came to this realisation too late, and their entire inheritance was used to pay off their equity release loan.
To avoid reliving the same horror story, seek advice from an Equity Release Council member. They’re bound to offer you the most comprehensive and unbiased advice.
A Real-World Example of an Equity Release Horror Story
According to the Express3, John took out a £15,000 equity release loan in 2001 to cover the renovation expenses he planned for his home.
With no income or savings, John felt that equity release was his only option.
It wasn’t until 2017, when Robert, John’s son, looked over his father’s finances, that they discovered just how much the equity release loan had grown. His original £15,000 had grown to £60,000.
When John passed away in 2018, his son Robert attempted to pay off the loan, but as his mother was still alive, the contract still stood. He was told that in order to exit the contract at that point, he would be charged a £12,000 exit fee.
John’s equity release loan continues to grow today, and with no option to pay any of it off before his mother passes away, it could increase by a further £30,000 to £40,000.
Unfortunately, this real-life horror story could’ve easily been avoided had John been given honest and unbiased advice by a qualified adviser with an Equity Release Council membership.
Should I Let Equity Release Horror Stories Put Me Off?
You shouldn’t let equity release horror stories put you off; instead, learn from them.
Make sure that you only seek advice and borrow money from Equity Release Council members.
The Standards Board4 exists as part of the Equity Release Council to ensure that all products conform to best industry practices and are safe and reliable for borrowers.
How to Avoid Equity Release Horror Stories?
You can avoid becoming a victim of equity release horror stories by discussing your options with a qualified adviser and only borrowing what you need.
Let’s explore these points in more detail.
Discuss Your Options With an Advisor
Contact an adviser who is a member of the Equity Release Council.
Go through all of the pros and cons of equity release, particularly its implications on your life.
Be sure to give your adviser as much financial background information as possible. By doing this, you’ll fully equip them to suggest suitable options.
Only Take Out What You Need
It’s tempting to borrow large amounts of money, but be sure only to release what you really need.
The more you release, the higher the interest rates and the quicker your loan will grow.
What Are the Long-Term Implications of Equity Release?
The long-term implications of equity release include receiving below market value for your property when it’s sold, selling your beloved family home, and leaving behind little to no inheritance for your loved ones.
How Can I Avoid Equity Release Horror Stories?
You can avoid equity release horror stories by seeking professional advice from a member of the Equity Release Council.
Doing this can determine whether it’s the right option for you or whether you should be looking at alternatives.
Is There a Way to Limit the Financial Consequences of an Equity Release Plan?
You can avoid the financial consequences of an equity release plan by doing your research and getting professional advice.
Make sure you run through all of the alternative options to see if there’s a better-suited plan available to you.
Can I Trust My Equity Release Lender?
You’ll know if you can trust your equity release lender by checking whether they’re members of the Equity Release Council (ERC).
Members are obliged to act with integrity and transparency when offering advice, ensuring you’re correctly informed and fully protected.
What Steps Do I Need to Take if I Want to Avoid Doubling My Debts?
The steps you need to take if you want to avoid doubling your debts include making monthly repayments and seeking professional advice.
Speak to your adviser about the option of paying off the interest on your loan. This’ll avoid compound interest payments at the end of the loan agreement.
What’ll Happen if the Lender Is Owed More Than My Property Is Worth?
If the lender is owed more than what your property is worth and your lender is a member of the Equity Release Council, then you and your estate will be protected by the No Negative Equity Guarantee.
This guarantee ensures you’ll never owe more than what your property is worth.
Should there be a shortfall, your lender will absorb it and will typically have insurance to cover such an event.
Where Can I Find Unbiased Equity Release Advice That I Can Trust?
You can find unbiased equity release advice that you can trust from any member of the Equity Release Council.
Members are bound by strict guidelines and a code of conduct to ensure that you’re offered comprehensive, honest, and unbiased advice.
The internet is littered with equity release horror stories, but they shouldn’t be the reason you choose not to take out a plan.
As with any decision that can considerably impact your life, it’s vital that you do your homework and weigh up the pros and cons.
With the right professional advice and the guidance and protection of the Equity Release Council, your chances of falling victim to any horror stories are minimal.
In fact, quite the opposite could be true. Equity release could have you living the fairytale life you had always imagined.
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