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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Why does equity release have a bad reputation?
Equity release has a bad reputation because the initial version, ‘Home Reversion,’ was unregulated in the 1990s. This lack of regulation led to some unethical practices, resulting in people losing their homes. Although home reversion plans are now regulated, they have been largely replaced by the newer version of equity release, a ‘Lifetime Mortgage.’
an Equity Release Horror Story: £500,000 In Interest Rate & £96,000 in Penalty
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. You can read their full horror story here.
There are countless equity-release horror stories if you want to Google this term.
Equity Release Horror Story 2: Meet Couple Who Must Pay £135,000
“Thinking of taking out equity release? Meet the retired couple who must pay Aviva £135,000 to spend their last years together”
The headline from thisismoney.co.uk is scary.
In 2003, Roy and Jean took an equity release of £43,000, which has since increased to £119,000. Sadly, Roy’s health deteriorated, and Jean struggled with her eyesight, prompting them to sell their home and move into sheltered accommodation. However, this decision triggered an Early Repayment Charge (ERC) of £16,430. The lender deemed Roy to require long-term care, but not Jane, which meant their plan did not end naturally.
It’s important to note that the interest rate charged on this lifetime mortgage was 7.10%.
Equity Release Horror Story 3: Pay Back Bank £255,000 Vs Loan £41,250.
“We’d need to pay the bank £255,000 on the sale for borrowing just £41,250 12 years ago, and so can’t buy a replacement home,” John says in an article written by The Guardian back in 2009.
Blimey, that headline from thisismoney.co.uk is a real shocker, innit?
That’s a hefty sum to fork out, but why’s it so much? This was Shared Appreciation Mortgages (SAMs). And we can’t forget about those, because that’s where most of the horror stories come from.
So, how do these SAMs work, then? It’s like this: you get a lump sum of cash, but instead of paying interest, the lender gets a slice of the future increase in your property’s value.
In John’s case, the lender took a whopping 75% of the appreciation. Now, he agreed to that when he took out the plan, but he’s gobsmacked by the amount he’s gotta pay back (and we don’t blame him, to be fair).
These plans were sold back in ’96 and ’97, before anyone could’ve predicted the massive property price boom. We think this was a con, and the UK parliament agrees.
A Recent Equity Release Horror Story
Published by The Telegraph last year, the headline reads.
‘Aviva charged me £22,000 to cancel Dad’s equity release loan even though he’s presumed dead’
Ernest Mackie was last sighted in 2011 and is presumed deceased after an extensive search was conducted.
After coming to terms with the sudden bereavement, Ernest’s son discovered that his father had taken out a lifetime mortgage in three separate instalments, dating back to 2001. The total sum of £62,000 had escalated to £142,500. “I quickly twigged how these dreadful things operate,” Mr Mackie remarked, “and I realised that if my mother, aged 75 at the time, lived another 10 or 15 years, the debt would burgeon to as much as £320,000, and there would be no equity remaining in the home.”
Although Mr Mackie’s assessment could have been accurate, most individuals would also anticipate property values to appreciate over the next 15 years, so there should be some equity left in the home. Nevertheless, Mr Mackie desired to prevent the balance from growing further, so he decided to repay the loan.
Mr Mackie expected Aviva to waive the early repayment charge due to the unforeseen circumstance of his father’s tragic demise. However, as his mother planned to continue residing in the property, there was no trigger to repay the balance.
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.
If the owner moves into a residential care home or dies, then the house is sold to pay off the house repayment plan.
Lifetime house repayments allow you to pay off interest or capital element of it subject to any early repayment charges.
Home Reversion
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.
Do you pay tax on equity release?
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.
Is there a catch to equity release?
Equity release plans give you a cash lump sum or regular income. The catch is that the money must be repaid when you die or move into long-term care. With a Lifetime Mortgage, you owe the original amount borrowed plus interest. With a Home Reversion Plan, you no longer fully own your home.
The Compound Interest Catch
With lifetime mortgages, where you don’t make any interest payments, folks often talk about the compound interest as “the catch.” This refers to the interest building up on the interest already added to the loan.
An Example
Let’s say you take out a lifetime mortgage of £50,000 at 5% interest, without making any payments. Here’s how the balance owed could grow over time due to the compound interest catch:
- After 10 years, you’d owe around £81,000
- After 20 years, it becomes roughly £133,000
- And after 30 years, the balance shoots up to about £216,000
So while you initially borrowed £50,000, the compound interest catch means the amount you owe keeps increasing rapidly over the years if you don’t make any payments. That’s why it’s crucial to understand this catch before taking out a lifetime mortgage.
The table below shows £50,000 borrowed on a compound interest rate of 5% with no repayments over a 10 year period:
| Year | Balance Owed (£) |
|---|---|
| 1 | 52,500.00 |
| 2 | 55,125.00 |
| 3 | 57,881.25 |
| 4 | 60,775.31 |
| 5 | 63,814.07 |
| 6 | 67,004.77 |
| 7 | 70,355.00 |
| 8 | 73,872.75 |
| 9 | 77,566.39 |
| 10 | 81,444.71 |
What is the bad side of equity release?
These are the bad sides of equity release. Some of the cons include:
- Your inheritance for family may be reduced. When you pass away or move into long-term care, at least part of your home’s value will go towards repaying the equity release provider. This could mean a smaller inheritance for your relatives.
- You may lose some state benefits. Taking a lump sum from equity release could affect your eligibility for means-tested benefits like Pension Credit, Savings Credit, or Council Tax Reduction – both now and in the future when you may need them.
- Interest charges will increase your debt. With a lifetime mortgage, if you don’t repay all the interest each month, it gets added to your loan balance. This can potentially lead to owing the entire value of your home to the provider when it’s sold.
- Additional fees may apply. Expect to pay initial setup fees, which vary by provider. Early repayment charges could also apply if you end the plan prematurely.
- No further loans against your home. Once you have an equity release plan, you cannot use your property as security for any additional loans. However, you may be able to release more equity later with your existing provider if available.
Is equity release dodgy?
In our opinion, equity release can seem dodgy and like a scam because of punitive charges and compound interest rates that quickly eat away any remaining equity. Sellers or their inheritors find these tactics unethical:
Risk | Equity release product |
The main disadvantage is that it does not pay the full market value for your home.
You will only receive (usually) a maximum of 60% of the market value of your home, and often much less (as little as 30%). | Home Reversion or Lifetime Mortgages |
You will receive far less money than from selling on the open market, but you would still need to find somewhere else to live. | Equity Release |
You run the risk of owing far more than you borrowed when you sell your home – up to the total value of the property (but not more than that). | Lifetime Mortgage |
Charges interest, similar to a regular mortgage. If interest is not paid regularly, the entire sum will compound, potentially doubling around every 7 years at 10% interest. | Equity Release |
A good reason to be wary if you hope to leave a decent inheritance for your family. | Lifetime Mortgage |
One way to reduce risk is to pay off interest as you go or take out a series of smaller lifetime mortgages over the years. | Lifetime Mortgage |
Your money is better off invested in your home, where it is likely to grow, than in a cash bank account. | Equity Release |
Having lots of money in a bank account may reduce the benefits you are entitled to, including help with the cost of care. | Equity Release |
The value of your home is not included in any means test as long as you are living there, while any cash in the bank will be. | Equity Release |
You can end a lifetime mortgage early, but this can cost you. It’s important to speak to a financial adviser as soon as possible to work out the most cost-effective way of organising your finances. | Lifetime Mortgage |
If you want to move home, you can keep your scheme running as normal, but you’ll have to tell the equity release company so they can decide if your new home is similar in value.
You need to ensure that your home reversion contract allows you to move home, if necessary, and there are no clauses that could cause problems or expenses in the future. | Lifetime Mortgage |
The home will also have to be vacated very quickly after your death, often within a month. This can be a large additional stress on your family. | Equity Release |
It’s worth asking a financial adviser and a solicitor to study the contract to ensure it is in your best interests.
With any form of equity release, have your independent financial adviser or mortgage broker explain the risks to you, including how much it could cost your family in the long term and whether downsizing might be a better option.
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.
Negative Equity
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.
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 an 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. 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 schemes have been discussed in the UK Parliament.
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.
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?
A better alternative is to sell your house fast for cash. You can consider auctioning a house or selling it with certainty to a cash house-buying company.
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 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 it 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.
Sell with certainty & speed
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.
Sell with certainty & speed
We Can Help You With Your Onward Purchase
Buying or selling a home is a very stressful process. Why not sell to us and let us help you negotiate a good price on your onward purchase?
Here’s why sellers trust us:
Property Saviour Price Promise
- The price we’ll offer is the price that you will receive with no hidden deductions.
- Be careful with ‘cash buyers’ who require a valuation needed for a mortgage or bridging loan.
- These valuations or surveys result in delays and price reductions later on.
- We are cash buyers. There are no surveys.
- We always provide proof of funds with every formal offer issued.
We'll Pay £1,500 Towards Your Legal Fees
- No long exclusivity agreement to sign because we are the buyers.
- You are welcome to use your own solicitor.
- If you don’t have one, we can ask our solicitors for recommendations.
- We share our solicitor’s details and issue a Memorandum of Sale.
Sell With Certainty & Speed
- Our approach is transparent and ethical, which is why sellers trust us.
- 100% Discretion guaranteed.
- If you have another buyer, you can put us in a contracts race to see who completes first.
- Complete in 10 days or at a timescale that works for you. You are in control.
