Is equity release a viable option? Are there any equity release horror stories?

Before we look at how equity release horror stories could originate, let’s find out more about the subject.

What is equity release?

Equity release allows individuals aged 55 and over to release money from the property in which they live, whilst still residing in their property, without having to make any monthly repayments.

There are two different equity release options:

Lifetime house repayments

A lifetime house repayment is a common type of equity release in the UK. It allows you to take out a house repayment secured on your property, whilst still retaining ownership of your home, as long as the property serves as your main residence. Upon passing, or moving into long-term residential care, the house sells in probate and the money made will go towards the house repayments payment. If you choose a lifetime house repayment, you have the option of making payments on the house repayments or allowing interest payments to be collected as part of the debt.

Home reversion

This option means you sell part of your house to a reversion provider so that you can still live in the property. The reversion provider will either give you a lump sum or periodic payments for the part of the property which has been sold. You can  continue living in the property, without having to pay rent on the part of the home that’s been sold. However, you must continue to maintain and insure that part of the house. There is also the option of using a tactic called ‘ring-fencing’. In this situation, you can secure part of the property for inheritance, whilst selling the rest of the property.

Who qualifies for equity release?

Not everybody is eligible for equity release. As well as the age restrictions (at least 55 years old for a lifetime house repayment or at least 65 for a home reversion plan), you must own a UK property that is your main residence, and it must be in a reasonable condition as well as being worth more than a predetermined value.

Also, if you have a house repayment or secured loan on your home, you could still get equity release, but it will depend upon the value of your home and the amount that is currently outstanding. Any outstanding amount will need to be repaid at the same time as taking equity release.

Something else to consider is that equity release may not be suitable if you have dependents living with you at the property. That’s because they will need to take legal advice before having to sign a contract to confirm they understand that they will no longer have the right to continue living in your property if you pass away or go into long-term residential care whilst they are still a dependent.

These are all reasons why you’ll need to find out as much as you can about your options and consider the advantages and disadvantages before you decide if equity release really is right for you. Not doing this research could lead to you being another equity release horror story and unexpectedly experiencing one or more of these four issues:

1. Negative equity

One of the most common equity release horror stories is when the interest charged on the equity release surpasses the value of the property, meaning you are left owing considerably more than the property is worth.

2. Compound interest

With equity release, the interest paid is what’s called ‘compound interest’. This means that the amount of interest grows quickly because you’re paying interest on top of interest. The total cost that you pay over time on your equity release loan could end up being huge when compound interest is added to it, especially when high-interest rates are used.

3. Early repayment charges

Another common equity release horror story is when equity release lenders place very high early repayment fees in order to discourage borrowers from using them as a short-term lending facility. It means you are stuck in your equity release scheme for years, so more compound interest is accumulated, creating an ever-increasing debt to repay.

4. No inheritance for your family

The final equity release horror story is that when you’re stuck in equity release, you won’t be able to ring-fence any equity. That means you won’t have any equity to leave for your family through inheritance.

Other consequences of equity release

Although equity release sounds like a plan to get your hands on cash quickly, it does come with several long-term implications. It’s important you take into account the perils of equity release before you decide to commit.

For example:

• Equity release reduces the value of your estate and so the amount that will go to the people named in your will is also going to be reduced

• A home reversion plan will mean that a reversion company will own all or a share of your home so it won’t fully be yours

• Using equity release may reduce your entitlement to state benefits, either now or in the future

• If you currently have care in your home that is either fully or partially funded by the local council, they are likely to start to charge you, or ask you to pay more for the services you receive

A real-life example of an equity release horror story

ThisIsMoney reported in September 2021 that widow Jane Horton was handed a settlement figure of £996,572 after taking out a £384,000 equity release loan with her late husband in 2008.

This figure included more than £500,000 of interest charges and a £96,000 early exit penalty fee. In the first year alone, £27,000 of interest was added to the loan and due to the compounding interest charges, the annual interest bill had grown to almost £62,000 by the 13th year.

Who regulates equity release, to avoid these horror stories from occurring?

The Equity Release Council ‘represents the equity release sector and exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart.’ The Council is a consumer centric trade body that is focused on key themes of

• representative lobbying
• leading and setting high standards for consumers
• awareness of how housing wealth can help with financial challenges

Is there a viable alternative to equity release (so that I don’t become another horror story)?

One of the reasons that homeowners may consider equity release is so that they can continue to live in their home.

Naturally, we all want the best of both worlds; to be able to keep living where we are whilst having more cash available.

Many people make the mistake of not exploring other options when taking out an equity release loan, so here are six alternatives to equity release:

1. Change your mortgage
2. Remortgage
3. Take out a personal loan
4. Use a credit card
5. Ask your family
6. Downsize

Let’s look at each of these options as a way to avoid experiencing an equity release horror story.

1. Change your mortgage

There are alternative types of mortgages to look at instead of choosing equity release. One of these equity release alternatives is a Retirement Interest-Only mortgage (RIO), which is similar to a lifetime mortgage.

With an RIO, you can borrow a larger percentage of your property’s value than you could with equity release; sometimes up to 75% of the value of your property. However, unlike with equity release, you are required to make monthly interest repayments. The loan amount is then also paid back from the sale of your property when you pass on or move into permanent care.

You will have to go through affordability checks but the good news is that the interest rates are generally lower with an RIO than with equity release, so it’s less likely to turn into a horror story.

2. Remortgage

If you have an existing mortgage on your property, you could consider remortgaging your home or extending your current mortgage. Remortgaging with a lower interest rate and improved terms could reduce your monthly payments, allowing you to have more spending money. It’s also a way to release some cash that is tied up in your estate.

It’s important to know the difference between fixed rates, variable rates and trackers when you’re looking to remortgage so that you don’t pay more than necessary. For peace of mind, a mortgage broker would be able to help you with this.

3. Take out a personal loan

As a retiree, you have the option of taking out a secured loan against your estate. This could be a viable option because it would help you to avoid the high equity release costs. Loans are available on a short-term or long-term basis, making them different from the life-long commitment you have with equity release. Secured loans allow you to borrow more than unsecured personal loans because using your home as collateral lowers the risk for the lender.

When you take out a loan, you must make monthly repayments; unlike with equity release where you don’t have to make a single payment in your lifetime. What this means is that you can risk losing your house if you don’t keep up with the repayments. This is different from equity release where you’d be able to stay in your home until you pass away or move into permanent care.

4. Use a credit card

A credit card could be worth considering if you need to access a relatively small amount of cash quite quickly. Some credit cards have low-interest rates – or even no interest on new purchases – for a set time, but read the small print to check for fees, including annual fees.

There will be monthly repayments to make on a credit card (sometimes with interest charged on top), whereas you have no obligation to make a payment with equity release. Using a credit card could be a solution if you need to fund, for example, house repairs but may not be suitable for large amounts.

5. Ask your family

While this may not be ideal in all cases, it would make financial sense to find out if your family could help you. Just make sure that you’re both clear on whether the sum is a gift or a loan so that you can avoid any awkward situations later.

Borrowing money from family means your estate will remain intact and you won’t be paying the costs involved with equity release, so it’ll increase the value of your family’s inheritance.

For larger sums or long-term solutions, you could also ask your relatives to purchase your estate (or part of it) and then sign a long-term lease to enable you to remain living there. If you do this, there are aspects to consider. For example, if your child were to buy your home and then they are declared bankrupt, you could be evicted because you’re only a tenant. Also, if their marriage were to break down, your house could be disputed during the divorce hearings.

As well as those scenarios, complex tax circumstances could come up, especially if you sold the property for a discounted rate. In a situation like this, HMRC and relevant local authorities could assume that you have successfully given a proportion of your estate away and so it would be considered a portion of the taxable estate upon death. Even so, it could be a cheaper alternative than equity release, so seek legal and tax advice before pursuing this option.

6. Downsize
   Downsizing is a popular way of freeing up some extra money. If your home and/or the garden feel too big for you, downsizing will mean you’ll be in a more suitable space with fewer, or reduced, maintenance costs. This could even be an opportunity to relocate and realise a retirement dream.

If downsizing is an option, you could consider selling your property to a fast sale company to secure cash quickly so that you’re in a strong position to buy your next (smaller) home. A fast sale cash buying company will give you a cash offer and the guarantee of a secure sale so you can be sure it won’t fall through. A further benefit for you is that there won’t be fees to pay so the price they offer is the amount you’ll receive.

For your own security, check that the company is a member of the National Association of Property Buyers (NAPB) and The Property Ombudsman. This will give you independent help if there’s a dispute and also means that they have to abide by a code of conduct, so the service you’ll get is likely to be exemplary.

There are a few other things that you can do for your own piece of mind when choosing a fast cash sale buyer. These include:

Speak to a few cash buying companies

All property buying and fast sale companies are different so find out what they each have to offer and if it suits your situation.

Get everything in writing – This way, you can recheck any details and you’ll have evidence of the price that was offered to you for your property.

Carefully read the paperwork – Some companies will hide important details in the small print, so don’t sign until you’re comfortable with the terms and conditions.

Fixed offer – It’s not uncommon for some less scrupulous companies to reduce their offer at the last minute, leaving you with little choice but to accept, so check it’s a fixed offer.

Check out their feedback online – There are review websites (such as allAgents) that collate feedback on estate agents and fast sale cash buyers. Have a look at the comments left by people like you to see how they were treated.

Complaints procedure – A respectable company will put customer service at the top of their priority list and will be happy to tell you what happens if you’re unhappy.

Timescales – Cash buying companies proudly boast that sales are conducted within a short period, but make sure that the timescale suits you.

Also find out if the cash buying company is available at any time. Selling a property can be an emotional and stressful time so if you’ve questions, you want them to be answered, and that won’t always be between 9am and 5pm. Having a 24-hour service makes the process easier for you.

Any questions?

We hope this article has helped you to understand the horror stories that can originate if you don’t fully grasp equity release, and see that alternative options are available that will help you to obtain and save money. Before taking any action, you may want to contact an independent financial adviser.

If you have any questions about selling your property instead of using equity release, we’ll be happy to have a chat with you.