The thought of being able to release equity tied up in your home and not having to pay back a penny of it – until death or property being sold to pay for care home fees – can be attractive on paper.
There is an alternative option to downsize to a smaller property such as a bungalow, release the equity and spend it as you wish without worrying about compound interest, charges and leaving an inheritance legacy to your loved ones.
If you live in your forever home, have you spoken with a mortgage broker about lifetime mortgages? You may wish to read up on how do I get my house valued for a remortgage.
Before deciding whether equity release is right for you, here are some real-life horror stories we encountered.
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A Real-World Example of an Equity Release Horror Story
The most horrific real-world example of an equity release plan gone wrong is the story of David and Jane Horton, who lived on a 35-acre farm in Hampshire.
The small farm they lived on was given to David and Jane as a wedding gift in 1975. Having spent their entire life on the farm in 2008, David decided to take on a £384,000 equity release loan based on the advice of his financial advisor.
David had accumulated debt and needed the money to pay off creditors and enjoy the time they had left on the farm. However, in 2013, David was killed in a tragic riding accident and after 7 years of managing on her own, Jane finally decided to put the farm on the market for sale in 2020.
To her surprise, once she put the property on the market, she discovered that David had taken out an equity release loan in 2008. Even more shocking was that she now had to pay close to £1 million pounds to clear that equity release loan.
David had purchased the equity release plan at a 6.87% interest rate. After 13 years, the interest charges had accumulated to a whopping £500,000+, and the lender had also charged her a nearly £100,000 early exit fee.
In the end, Jane was only left with less than half of the proceeds from the sale of the farm, and her nightmare experience was a warning to all those considering an equity release plan for their property.
There are countless equity-release horror stories if you want to Google this term.
What is equity release?
Equity release allows you to draw down equity locked in your property without selling or moving out. When it comes to equity release, there are two options:
Lifetime house repayments
A lifetime house repayment allows homeowners to withdraw funds while retaining their home ownership. The loan is secured against the property with interest added. This is the most common form of equity release.
Lifetime house repayments allow you to pay off interest or capital element of it subject to any early repayment charges.
Home reversion is a technical term for selling part of a house to an equity release provider while allowing the homeowner to live in their property.
The equity provider will give the homeowner a cash lump sum or periodic payments towards part of the property that’s being sold.
The homeowner can continue living in the property rent-free, but they must maintain the property and insure it fully.
There may be an option to ‘ring fence’ part of the property for inheritance purposes whilst the rest is sold.
Who qualifies for equity release?
Not all homeowners qualify for equity release because the following conditions must be met:
- You must be over 55 to qualify for a lifetime house repayment plan.
- You must be over 65 to qualify for a home reversion plan.
- You must own the property in the UK as your main residence.
- The property must be in good condition, exceed a certain value, and be mortgageable.
- You must pay off any existing mortgage or loans secured against the property to get equity release. Loan to value ratio will be a key consideration. You can use equity release to pay off any existing mortgage, but remember, this will be more expensive.
- Any dependants living with you must take independent legal advice. They will need to sign a contract to confirm that they do not have the right to continue to live at the property should they go into long-term residential care or die.
Pitfalls of equity release
Equity release sounds like a great idea to get your hands on some cash quickly until you start to explore its disadvantages.
You need to consider the long-term implications of equity release, including:
- One of the pitfalls of equity release is that the value of your estate is reduced. The amount left in your Will to your beneficiaries is drastically reduced. Estate means everything you own, including property, money, shares, and possessions.
- An equity release company could own all your property, depending on the amount owed.
- Your entitlement to benefits could be reduced now or in the future. Consult with DWP for further information before proceeding.
- You may be asked to contribute towards care in your home funded by the local council, or they could start charging you more.
Compound Interest Charges
Naturally, interest is also charged on any equity you have released from the property. Combined with high arrangement fees, punitive exit fees, and a high-interest rate, equity release plans can easily result in negative equity, accounting for a significant loss to the homeowner.
With any equity release plan, interest is deferred, and you’ll pay interest on interest, meaning that the amount owed can quickly rack up. It will have ballooned substantially when it comes to paying off the loan.
An elderly couple borrowed £42,900 in 2003; over 12 years, the amount owed stood at £119,391 because of compound interest.
This is one of many real-life horror stories of equity release loans.
Over an extended period, it is not uncommon for a property to go into negative equity once compound interest, early repayment charges and punitive fees are added.
If the borrower lives 10 years after taking the equity release loan, then upon their demise, the interest and charges exceed the value of a property.
Debts that double with compound interest
Compound interest is when any unpaid interest is added to the borrowed initial amount, and then interest is charged on the total outstanding balance.
This table gives an illustration of how it works in practice. It doesn’t include any fees. It is easy to see how £100,000 borrowed easily becomes £146,410, so in 4 years, £46,410 is added in interest.
Do you know what would be the outstanding balance of an equity release loan with 10% compound interest after 10 years on £100,000 borrowed? An eye-watering £259,734.25. It is easy to see why a property can easily fall into a negative equity situation.
Early Repayment Charges (ERC)
Another story we hear is about people who have been ‘locked in’ on an equity release plan they cannot get out of. If you try to pay your equity release back sooner, you can often be charged with an extremely costly Early Repayment Charge (ERC).
Lenders include a high ERC to discourage borrowers from paying off loans early. This can leave you stuck with an equity release scheme for several years and increasing debt owed daily. This situation is referred to as ‘equity release prisoner’.
Now, you would think paying off your debt sooner would be in the best interest of both you and the lender. However, this is not the case with equity release plans. Your lender will want you to take as long as possible, as that is how they are able to maximise their returns.
Due to these ridiculously high exit fees, you cannot sell your home to pay off an equity release loan.
Early repayment fees are usually waived if you go into care or die.
Can I sell my house if I have equity release?
The answer depends on the discretion of your equity release lender, as a few lenders will allow you to transfer the loan to a lower-valued property.
If you are downsizing, then your lender can decide that you have repaid some of the loan back. This will trigger an early repayment charge.
Can you lose your home with equity release?
When you release equity, the loan is typically 40% against the value of your home. So, can your home get repossessed under equity release?
You are unlikely to lose your home unless you have changed the property usage. For example, you have taken in lodgers or have additional family members moved in.
No inheritance left for the family
Often, children rely on the Bank of Mum & Dad to help them provide financial assistance as part of their inheritance.
However, with inflated interest rates and early repayment charges, you cannot ring-fence any equity if you opt for an equity release plan.
It can be extremely disheartening to learn that there is no inheritance left for the children and that the home they have been brought up in is no longer their own.
However, for many who opt for equity release plans, this is the sad reality their families must face upon death.
Equity Release vs Downsizing: Pros and Cons
Downsizing to a smaller home, such as a bungalow, enables you to release equity guilt-free. You won’t need to worry about paying bills, particularly if you are ill.
The equity released from the sale of your home will be yours forever. To spend it as you wish, without the interest charges or extortionate fees, keeps you up at night.
You will also own your new home outright, which could be left as a legacy for your loved ones or sold to pay for private care home fees.
In the table below, we cover the pros and cons of equity release vs downsizing:
Homeowners fall into the trap of equity release loans when their mortgage term ends. Usually, the balance is low, and you can speak to your bank to extend the term or put you on interest-only payments for a few months until you have sold your home.
Equity release isn’t a viable option if you plan to leave an inheritance for your children or grandchildren. It will certainly be the most expensive option.
You won’t want your surviving partner to face eviction in their golden years. Why not sell your home for cash and buy a small property outright? We can help you find your next home and, if needed, negotiate the price on your behalf.
No estate agents are involved, no fees to pay, and just one viewing is all it takes.
You will have cash in your bank account within 10 working days or quicker. You are not expected to move out straight away. We can agree to a rent-free period to allow you time for your onward purchase and move.
You will have released equity that you can put into savings or risk-free premium bonds and own your new home outright with no fear of eviction in future.
Is there a better alternative to equity release?
You will get serious buyers at an auction with their finances in place. Still, you’d have to wait a month before the auction for the marketing period and a month after the auction for the completion to occur – if it’s a traditional auction and not a modern auction method.
The buyer can change their mind, and the sale is not guaranteed. You’d have to pay upfront fees for auction entry and legal pack preparation. You’ll also have to pay for the auctioneer’s commission and your own legal fees.
Auction properties always have a stigma because it becomes public knowledge that a property was auctioned, and even your nosey neighbours can attend open viewings.
The problem is that auction buyers tend to kick walls and peel wallpaper and, therefore, can do damage to your property.
What if you need a discreet sale?
Here at Property Saviour, we are always looking to buy any property. We will make you a cash offer and exchange contracts quickly so that you have a deposit and a firm commitment that we won’t pull out of a sale.
We will complete within your timescale and even allow you a grace period to move out once you sell.
UK homeowners trust us to release equity, downsize and move on to the next chapter of their lives. Whether you have your eyes set on a bungalow that’s easy to maintain or you have mobility issues, we are here to help you.
You can see our real reviews left by sellers just like you.
We’ll pay £1,500 towards your legal fees, with no deductions. The price we offer is the price you get in your account. You’ll be effectively selling your house for free. Accept our offer and decide how soon you want to sell, FAST.
How to avoid your own equity release horror story?
You can take several sensible steps to avoid becoming the next equity-release horror story. These include:
- Speak to your lender if you are coming to the end of a fixed-term mortgage. Help is available, and banks are told to listen and act by the FCA. You may be able to get a payment holiday, put your mortgage to interest only temporarily for a few months and allow you to sell your home.
- Check the devil in the detail of any equity release plan you are considering. When you enquire, their salesperson will practically move into your home and force you to sign an agreement. Do not act under pressure, please.
- Work out how much equity you will release by buying a smaller home.
- Consider a discreet, direct and private sale to a reputable cash house buyer such as Property Saviour. We have many genuine reviews and would love your review too.
Equity release is treated as a loan and therefore, is exempt from taxation. Your primary home is also exempt from capital gains tax so there would be no tax to pay if you downsize.
With excessive fees, compound interest and early redemption charges, many home owners consider equity release plans to be a scam.