Contributors:
Expert VerifiedKey Takeaways
- Horror stories often stem from misunderstandings about how equity release works, such as unexpectedly high compound interest leading to substantial debt over time.
- Some borrowers have experienced issues with Early Repayment Charges being higher than anticipated, making it costly to repay the loan early.
- Issues may also arise from family members who were unaware of the plan, impacting inheritance expectations.
- Choosing a plan that is not approved by the Equity Release Council can result in less protection and transparency, leading to negative experiences.
- Receiving proper, unbiased advice and understanding the terms and conditions can help you avoid these scenarios, highlighting the importance of using reputable providers and advisors.
How can you protect yourself from being involved in an equity release horror story?
Horror stories tend to happen when potential equity release pitfalls are not avoided.
Despite this, equity release can be a very effective tool for accessing cash tied up in your property.
This article explores the following topics, drawing on our expertise in the field:
Read on as we discuss a number of real equity release horror stories and help you find out how to avoid a similar outcome.
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Real Equity Release Horror Stories
Real equity release horror stories are useful to pay attention to because they highlight the potential pitfalls of this type of loan and the unexpected outcomes that can arise.
By understanding the real-life experiences of others, prospective borrowers can better assess the risks and make more informed decisions.
Horror Story #1
In January 2024, a man discovered that his father had taken out an equity release loan and let the interest accumulate for 12 years.
By the time the son found out, the £100,000 loan had doubled to £200,000.1
The father had used the loan to cover credit card debt, and the son and his siblings could have helped if they had known.
Instead, their inheritance was cut by a third, and one sibling had to buy the house to clear the debt.
Horror Story #2
David and Joanne Horton took out a £384,000 equity release loan on their farm in 2008 to supplement their pension.
When Joanne tried to sell the farm in 2021, she discovered she needed almost £1 million to settle the debt, which included about £500,000 in rolled-up interest and a £96,000 Early Repayment Charge (ERC) triggered by a drop in the Bank of England’s base rate.2
The couple’s older plan did not allow for penalty-free repayment after a spouse’s death or move into care.
Horror Story #3
In the 1990s, Rosemary’s parents took out an equity release loan.
When her mother, June, died in 2019, Rosemary was shocked to find out she had only a month to leave the house.3
This was because her parents had a home reversion agreement, which typically allows just a month for surviving tenants to move out.
They had received £52,000 in 1994 for a 90% stake in their property, which is now worth close to £1 million.
Rosemary was eventually given two extra months to move out.
Horror Story #4
In 2014, Roy and Jean Tamplin decided to move into care but learned they had to repay £119,000 plus a £16,430 ERC for ending their loan early.4
Their agreement said the ERC would be waived if both moved into care simultaneously.
However, their provider decided that only Roy needed care, while Jean was fit to stay home, so they had to pay the ERC if they moved together.
These stories highlight the importance of understanding all terms and conditions of equity release plans and considering the potential long-term effects on inheritance and finances.
3 Common Equity Release Horror Stories Explained
The three most common equity release horror stories involve debts that double, Early Repayment Charges, and leaving no inheritance for your family.
Read on for an explanation of each of these common equity release horror stories.
Debts That Double
Debts that double happen because the compound interest on equity release loans keeps rolling over.
Essentially, compound interest is interest charged on interest.
This means that the interest on equity release loans can add up to significantly more than the interest on other types of loans.
Good news
If your lifetime mortgage is approved by the Equity Release Council, you will have the option of making interest repayments.
Even though making repayments on the equity you release is completely optional, if you do not make any repayments, your equity release debt could double in a few years.
Early Repayment Charges
Early Repayment Charges are levied when a borrower decides to repay their loan before it comes to the end of the term.
Why would someone do this?
Early repayments reduce the amount of interest payable on your equity release loan.
However
It is possible to make early repayments without incurring penalties, as long as you do not try to repay more than the limit set by your lender.
If your early repayment exceeds the lender’s annual cap, Early Repayment Penalties will apply.
No Inheritance for Your Family
You run the risk of leaving no property inheritance for your family as, typically, equity release loans are paid off when you pass away or when you are taken into a care facility.
This means that any inheritance tied up in your property will be diminished owing to the inevitable repayment of the loan.
This will not affect other inheritances earmarked for those family members and will only apply to the inheritance tied up in the equity release loan property.
Good news
You can ringfence part of your property to make sure your heirs will be able to inherit it.
If you would like to look into this option, speak to your advisor about Inheritance Protection.
How Can You Protect Yourself from Becoming Part of an Equity Release Horror Story?
You can protect yourself from becoming part of an equity release horror story by equipping yourself with the appropriate knowledge of all the implications of your decision.
Consulting an independent financial adviser who is a member of the Equity Release Council (ERC) will assist you in this.
Despite the potential pitfalls of equity release schemes, there are ways to make equity release schemes work for you and avoid becoming involved in an equity release horror story.
The Equity Release Council will help you do this.
The Equity Release Council (ERC) is a legal entity that regulates the equity release industry.
It exists to protect consumers from some of the horror stories of equity release and to ensure good practice amongst its members in the equity release sector.
So, what does this mean?
This means that equity release lenders who are members of the Equity Release Council are held to a regulatory standard that ensures they operate in an ethical manner.
Questions to Ask Yourself Before Deciding on Equity Release
If you’re considering applying for equity release, it is advisable to ask yourself certain questions to ensure you do not fall prey to equity release pitfalls.
Is Your Equity Release Lender Reputable?
Your equity release lender is reputable if they are a member of the Equity Release Council (ERC).
If they are a member of the ERC, they will be required to adhere to ethical business and lending practices.
How Do You Get Advice About the Pitfalls of Equity Release?
You can get sound advice on potential equity release pitfalls from an independent financial adviser who is registered with the Financial Conduct Authority and is a member of the Equity Release Council.
Have You Discussed Equity Release With Your Family?
It is important to discuss equity release with your family, as it is a serious decision and will have significant implications for them when you pass away or go into care.
Have Your Considered Any Alternatives to Equity Release?
There are alternatives that may be better solutions for you if you have taken independent advice and have determined that equity release might not be the ideal solution for you.
These alternatives include:
- Downsize by selling your home and moving into a less expensive alternative.
- Create another income stream by renting out one of your rooms.
- Keep earning an income by delaying your retirement, or creating a “side hustle”.
- Obtain a retirement interest-only mortgage. This alternative allows you to pay interest on the loan amount only, as opposed to the compound interest generated on the lifetime mortgage form of equity release.
Common Questions
How Do You Know Your Equity Release Lender is Trustworthy?
What Steps Can You Take to Avoid Doubling Your Debts?
What Happens if You Owe More Than Your Property is Worth?
What Are the Long-Term Implications of Equity Release?
Can You Lose Your Home With Equity Release?
Can You Lose Money With Equity Release?
In Conclusion
While equity release can offer financial freedom in retirement, it is essential to be aware of the potential pitfalls.
By understanding real-life horror stories and carefully considering all options, borrowers can make informed decisions to avoid significant debt and protect their financial future.
Always consult with a financial advisor to find the best plan suited to your needs.
The best way to protect yourself from equity release horror stories is to obtain advice from an independent financial advisor and ensure that you deal with an Equity Release Council-approved lender.
