If you’re considering releasing equity from your home, to avoid any nightmares it helps to be aware of the equity release horror stories people have faced.
Chosen wisely, equity release can offer homeowners a sense of financial freedom. Freedom to make home improvements, help the family financially or make the most of your retirement years. Chosen poorly, equity release could become an expensive mistake that could impact your family.
So how exactly do you stop your retirement dreams becoming an equity release horror story?
Equity release - nightmare or dream come true?
Equity release lets you access the money that is tied up in your home without the worry of monthly repayments. The money you release through a loan secured against your property is tax free and only repaid once you have died or moved into long-term care.
The equity release market is now regulated by the Financial Conduct Authority, however this wasn’t always the case. Poor practice by rogue equity release companies meant homeowners were tied to spiralling costs and families were left in debt.
Thankfully with tight regulation, the equity release horror stories of yesterday tend to be a thing of the past. But equity release isn’t right for everyone. It could still be an expensive mistake if you aren’t aware of the possible pitfalls and negative impact it could have on you and your family’s inheritance.
So what are the equity release horror stories?
The equity release horror stories these days revolve around making sure it’s the right option for you, choosing the right plan and a reputable lender. Here’s a closer look at the nightmares you may want to avoid:
Negative equity
In the past, there have been situations where homeowners have gone into negative equity with an equity release mortgage. This means the size of the loan and interest has become greater than the value of the property. This resulted in families going into debt just trying to pay off the money that was owed.
I’m pleased to say that these days, thanks to the Equity Release Council (ERC) and their ‘no negative equity guarantee’ this particular horror story shouldn’t happen. The no negative equity guarantee is offered by all EHC members and ensures that you will never owe more than the value of your property.
So, to make sure you are safe from this nightmare, just make sure your lender is a member of the EHC.
Compound interest
Compound interest isn’t so much a horror story, it’s more of a reality you need to be aware of. The interest charged on all equity release mortgages is compounded, which means as well as paying interest on the loan, you also pay interest on the interest already accrued. As a result, the loan grows at a much faster rate compared to a standard residential mortgage.
For example, if you released £50,000 from your property, with a compound interest rate of 5%, your loan would grow to £77,640 over 10 years.
When you take out a lifetime mortgage, which is the most popular type of equity release, you should be given a full illustration of the estimated costs involved. So you can make a fully informed decision on whether it’s the right option for you.
There are ways you can reduce the total cost as you have the option to repay some or all of the interest. And to keep costs to a minimum, you could also remortgage to a lower interest rate if the market changes and rates are reduced.
The main consideration here is whether releasing equity is worth the expense and if so, choosing the right type of lifetime mortgage that suits your requirements.
Early repayment charges
Equity release mortgages are not designed to be a short term fix. Although you can repay some of the debt, in general this type of mortgage is designed to be paid off when you die or move into long term care and your property is sold. Which is why repaying your loan ahead of time can be a costly thing to do.
Homeowners wishing to repay the loan early have felt trapped, facing hefty early repayment charges they perhaps weren’t completely aware of.
With the tight regulation of the FCA and the guidance of the ERC, this horror story shouldn’t happen as the advice you receive from a qualified IFA or broker should be completely transparent. Also lifetime mortgages are more flexible and varied these days, with some plans offering lower or no early repayment charges after a certain number of years.
Loss of inheritance
One of the benefits of equity release is that there are no monthly repayments, as the loan is only repaid when you die or move into residential care. The downside of this is that as the loan is repaid from the sale of your property, it will impact any inheritance you planned to leave to family.
The size of the loan will depend on how much you have borrowed and how long the mortgage is in place. The longer mortgage is in place, the more you will owe and the greater the impact will be to your family’s inheritance.
Of course if you don’t have children or you don’t plan on leaving an inheritance, this equity release horror story won’t worry you. However if you are concerned, you can either consider the alternatives to equity release, or choose a lifetime mortgage that allows you to guarantee a percentage of the property value is kept as an inheritance.
Impact on benefits
The final equity release horror story is only for homeowners who receive certain benefits, as a lifetime mortgage could impact any money you currently receive.
When you release equity, your savings will automatically increase. So any means tested benefits you currently received could be affected.
If you are in receipt of benefits and concerned about the possible impact releasing equity could have on the financial support you receive, speak to a qualified equity release adviser who will tell you if you have cause for concern.
How to avoid your own equity release nightmare
Releasing equity is a big decision and not the right solution for everyone. However, for some, using the hard earned cash that is tied up in your home makes complete sense. So, to avoid your own equity release horror story, make sure you:
- Seek independent advice from an equity release specialist
- Get a full illustration of costs
- Consider the alternatives
- Only choose a lender who is regulated by the FCA and a member of the ERC
- Consider your requirements and choose a lifetime mortgage that suits your requirements
- Know what the early repayment charges are