Equity Release Schemes / Equity Release Products

Before running through some of the horror stories it’s worth explaining how equity release schemes work.

Often touted as a good way to access a lump sum of money quickly (as opposed to selling the property). Home owners may make the decision to release equity for a range of reasons, including:

  • Paying for home improvements or renovations
  • Buying a new home
  • Paying off debts
  • Repaying a secured loan
  • Financing long trips or holidays
  • Providing financial support to family members
  • Adding to existing disposable income

There are two main equity release products…

Lifetime Mortgage

The first, and most common form of equity release is a lifetime mortgage, available to homeowners aged 55 and over.

Any money you receive is not subject to tax and you can remain in the property. This is a loan secured against your property which is only repaid upon your death, or when you go into long term care.

Anything that remains goes to your estate’s beneficiaries after you pass away. At this point, they will pay off the mortgage using any available funds or sell the property to pay the loan off.

Home Reversion Plan

Home Reversion Plan

Using this method, homeowners release equity by promising a share of their property to a lender or home reversion company.

Offering “tailormade” schemes (with varying terms) based on your circumstance, you would typically get between 30 and 60% of the property’s market value in return for a lump sum. You can then also remain in the property either rent free, for a fixed rate or for a monthly payment that increases by a set percentage annually.

That lender then takes over their share upon the borrower’s death, or when they sell their home.

5 Equity Release Horror Stories

Equity release comes with significant risk factors. This means that it is vital to undertake thorough research before choosing it as an option.

Equity Release Horror Story 1: Hampshire Widow Billed £1 Million

Equity Release Horror Story 1 - Hampshire Widow Billed £1 Million

In order to fund their retirement and to cover existing debts, David and Jane Horton had an equity release scheme – a lifetime mortgage – recommended to them by a financial adviser.

However, just five years after taking out an equity release loan to the tune of £384,000, David passed away.

As her husband had handled the family’s finances up until his death, Jane had not been aware of their growing debt due to compound interest charges.

Jane decided to put the family farm on the market in 2020. At this point, she discovered that she owed the equity release lender a staggering £996,572. This was due to the original loan, 6.87% interest payments owed to Prudential over the years and £96,000 in early repayment charges.

Equity Release Horror Story 2: North London Family Home Repossessed

Equity Release Horror Story 2 - North London Family Home Repossessed

According to a Guardian report, shortly after the death of an elderly woman in 2019, an equity release company gave her daughter just four weeks’ notice to vacate their family property.

In 1994, the mother had received a lump sum of money as part of a “home reversion” equity release scheme. Unlike a lifetime mortgage, equity release plans of this kind are not “loans” as such.

Instead, the borrower gives up a share of their home to the equity release lender. Upon the borrower’s death, the equity release provider then repossessed and took ownership of that portion.

In this case, the lender – who the daughter will not name in the article for fear of losing her remaining portion of the property – was to receive a 90% share.

In return, the organisation paid approximately £52,000 for the mother’s North London home.

While this was back in 1994, the property value would have been considerably higher than is reflected in this transaction.

Equity Release Horror Story 3: Son Charged £28,000 to Cancel Father’s Equity Release Plan

Equity Release Horror Story 3 - Son Charged £28,000 to Cancel Father's Equity Release Plan

Another real world example of the potential pitfalls of equity release is that of Bruce Mackie. His father, Ernest Mackie, went missing off the north coast of Aberdeenshire in the winter of 2011 and is presumed dead.

While dealing with a hugely challenging period in his life, Bruce discovered that Ernest had taken out three equity release loans with Aviva.

Ernest had released £62,000 – but compound interest had caused the amount to snowball to £142,500.

In order to help his mother escape from the growing debt, Bruce decided to pay off the loan by mortgaging his own home. However, he then discovered that there would be a substantial exit fee.

Initially, Bruce was quoted £22,000 to pay off the loan early. However, he spent a number of months attempting to persuade Aviva to drop the fee due to his family’s circumstances. At the end of this period, the amount had grown to almost £28,000.

Equity Release Horror Story 4: Elderly Woman from Nottinghamshire Loses Home to Equity Release

Equity Release Horror Story 4 - Elderly Woman from Nottinghamshire Loses Home to Equity Release

The story of Lesley Coombe and her mother, which appeared in the Telegraph, reveals the impact that equity release may have on inheritance.

Lesley’s mother released £40,000 of equity from her property in 2006. This enabled her to pay off the remaining mortgage on her property. However, at the time of writing, interest rates of 7% had resulted in the debt growing to £102,000.

The property itself is through to be worth £115,000, which means that Lesley’s mother owes over 88% of her property’s value to the Prudential.

The lender will take over the property in its entirety when Lesley’s mother dies. As a result of this, her children will not inherit any of its value.

Equity Release Horror Story 5: Waspi Wales Resident Forced to Give Up Childrens’ Inheritance

Equity Release Horror Story 5 - Waspi Wales Resident Forced to Give Up Childrens' Inheritance

Equity release can be even more of a nightmare when coupled with issues surrounding the age of retirement. Welsh resident Purita Somerville expected to retire in 2016 and had planned her finances accordingly.

However, the “equalisation” of the state pension age drastically changed her plans. This government action was due to be phased in over a decade from 2010. However, its pace increased after the introduction of the 2011 Pensions Act.

As a result of steps taken to bring the female age of retirement level with its equivalent for males, women born in the 1950s must now wait up to six extra years to receive their state pension.

Women Against State Pension Inequality (or WASPI), of which Purita is a member, was founded as part of a campaign against this.

Purita needed to subsidise her income in order to bridge the significant gap before her retirement. She felt that her only option was equity release.

She released £37,000 from her property – which is valued at £160,000 – by way of a lifetime mortgage. The loan came with a 3.8% interest rate.

As a result, her children are likely to receive no inheritance in the event of her death. However, she feels that she had no choice but to release equity from her home in order to survive until she could access her state pension.

How to Avoid Your Own Equity Release Horror Stories

If you are planning on releasing equity in your property, you should take great care to carefully research the matter before committing.

Here are some of the ways in which you can protect yourself against becoming an equity release prisoner or receiving a gigantic bill.

Make Sure Your Lender is a Member of the Equity Release Council

Make Sure Your Lender is a Member of the Equity Release Council

After many equity release horror stories coming to light over the years, the Equity Release Council was formed. This body serves to “promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart”.

You can check whether your provider is a member of the Equity Release Council by using their “find a member” section.

It is worth noting that the equity release industry is regulated by the Financial Conduct Authority – so it is possible to report any misconduct to this body.

Unfortunately, the equity release horror stories reported in this article do not amount to misconduct. This is because the equity release borrowers in question have entered into an agreement that was entirely legal at the time.

However, you can protect yourself against experiencing similar issues by taking great care to research the means by which you choose to release equity.

Seek Professional Advice

Seek Professional Advice on Equity Release

Firstly, you should discuss the matter with a financial adviser – and take care that they are independent. It is vital to seek unbiased equity release advice.

In the first of the above equity release horror stories, the adviser ended up receiving £7,120 in commission from the Prudential for “selling” the scheme to the recipients.

Check the Small Print on the Equity Release Agreement

Check the Small Print on the Equity Release Agreement

You should be confident that your equity release plan will not result in your owing more than you can afford.

You’ll also want to avoid being trapped in a lifetime mortgage agreement from which you can’t escape.

If your chosen provider is a member of the Equity Release Council, it is far less likely that they will be involved in any unscrupulous behaviour.

Seek Negative Equity Protection

Seek Negative Equity Protection

It’s important to consider your chances of entering negative equity.

Being in negative equity means that you owe more than your property is worth. It’s a major risk when taking out a lifetime mortgage.

Your arrangement should come with some form of “no negative equity guarantee”. This means that the estate from which the equity has been released will never owe more than the property value upon sale.

Look into Early Repayment Charges and Interest Rates

Look into Early Repayment Charges and Interest Rates

Many of the equity release horror stories we see in the press involve high early repayment fees. For this reason, it’s vital that you understand how much it will cost you to pay off your equity release loan when selling your property.

It’s also worth finding a good fixed interest rate. This will help you to avoid a shock further down the line.

Consider the Risk of Compound Interest

Consider the Risk of Compound Interest

Compound interest means that you owe interest payments on both a “principal” amount – say, for example, the equity release loan you’ve taken out – and on the interest owed as a result of taking out that loan.

It’s a good idea to talk to your equity release adviser and to do your own research to work out how much you’d have to pay to avoid compound interest.

Consider Equity Release’s Impact on Your Benefits

Consider Equity Release's Impact on Your Benefits

If you are on means tested benefits, you need to be aware that equity release may push you over the threshold stipulated by your provider.

Be sure to take care when looking into equity release to make sure that any released cash lump sum does not have long term implications regarding other financial support you are receiving.

What are the Alternatives to Equity Release Schemes?

If you are trying to find a way to improve your financial situation, there are a range of alternatives to equity release that are potentially less risky.

Make your Mortgage Work for You

Make your Mortgage Work for You

Consider your existing mortgage, for example. You may be able to check with your current lender to see if there is a way to change the terms, so that you are making lower repayments for longer.

There may also be more cost-effective remortgage options.

Look into Interest Only Mortgages

Look into Interest Only Mortgages

You may even be able to swap out your existing mortgage for one that involves interest only payments.

However, if you are on a fixed rate, you may incur fees for early repayment when doing this. For that reason, you must do your research before you decide on this approach.

Downsize Your Property

Downsize Your Property

Downsizing is a great alternative for releasing equity that applies to any homeowner who does not mind relocating. If you have enough equity in your existing property, you should be able to sell. You can then use the money to purchase a new home of lower value.

The amount left over will be a handy lump sum for you to utilise however you require.

Various options from a high street or online estate agency through to traditional property auction / modern method auction, private home buyer or as a cash sale if you’re looking for a speedier service.

Sell and Rent Back

Sell and Rent Back

Become a Landlord

Become a Landlord

You may even decide to rent out your property if your personal circumstances allow.

Rent a Room, for example, is a government scheme available whereby you can earn up to £7,500 from tenants who pay rent to you without you having to pay tax on that amount.

As long as you are confident that you can cover all the costs and handle all of the responsibilities involved in hosting tenants, this may be a good alternative to releasing equity, without the extra burden of income tax.

In Conclusion

It is possible to avoid equity release horror stories of your own. You just need to undertake careful research.

It’s also a good idea to make full use of the financial services relevant to this particular economic option.

There are a range of possible pitfalls of equity release. However, you can avoid these by ensuring that you select an option that meets your requirements.

You should also undertake careful research into matters like interest rates and other potential financial consequences.

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