If not careful with equity release, your retirement dream can soon become a nightmare!
If you’re over 55 and looking to release equity from your home, you must be aware of the horror stories involved with bad equity release decisions.
Luckily for you, we’ve combed the market, looked into numerous instances of equity release, and found the most vital stories to share.
By reading this article you’ll:
- Be in the know about equity release horror stories.
- Discover how to avoid equity release from negatively impacting your life.
- Learn the signs of how to know if equity release could be right for you.
Here’s how to ensure equity release is not a bad financial decision for you and your family.
A Brief List of Different Equity Horror Stories
The great news is that there are ways to avoid becoming an equity release horror story statistic.
The majority of these stories are from people who were not aware of the amount of equity that was released from their home. This is easily avoidable if you receive clear communication from your independent financial adviser and equity release plan provider.
In addition, the vast amount of these stories are from people who made poor investment decisions using the cash from their equity release plan. Unlocking too much cash and spending it badly, or selecting the wrong plan, can leave you cash-strapped in the future.
Before considering equity release, be fully aware of the pros and cons. You must also be sure to think about your entire retirement and not just your short-term financial needs.
Some people make the mistake of not paying attention to how much equity they are releasing and end up with negative equity after taking out a loan. Luckily there is a ‘no negative equity’1 guarantee set out by the Equity Release Council2. This means that when you pass away or move into permanent care, your family will never owe more than the value of your estate.
It’s really important to educate yourself about all types of investment options and equity release alternatives, so you know exactly what risks come with each different decision.
If you’re considering an equity release plan, ask yourself the following:
- How will my lifestyle change in the future? (This should include food and activity costs)
- What debts do I need to pay back with my equity release money?
- Could my plan land me with negative equity?
Despite the ‘no negative equity guarantee’, negative equity can still be a concern because it will mean that none of your estate will be available for your inheritance.
The interest rates and fees for an equity release plan can be much higher than with other types of loans.
Compound interest4 is another thing to consider because the more you have in debt, the more money will be added to your loan balance every month due to this type of interest rate.
The total cost that someone pays overtime on their loan could end up being huge when they add compound interests into it, especially if high interest rates come from not paying off what was owed quickly enough at first.
It’s good to know these things before signing any kind of agreement, so you’ll know exactly how much risk comes along with each different decision. You should also read all parts of any contract carefully to make sure everything has been explained to you fully.
Debts That Double
Many people make the mistake of not exploring other options when considering an equity release loan first before deciding what they want. Property owners need to explore all different avenues.
Hence, they know exactly what risks come with each type of investment decision before going ahead with anything at all – this includes understanding potential financial consequences and lifestyle changes, negative amortisation5 loans, and doubling debts.
Learn more about: Equity Release Alternatives
Early Repayment Charges
Another big problem is that some people don’t realise there are early repayment charges for those trying to repay the loan before they pass away or move into permanent care. These fees can be as high as 25% of the outstanding balance, making paying back a lot more difficult than expected.
Life doesn’t always go as planned and you might find yourself needing to relocate to a new country, forcing you to pay back the loan in advance.
No Inheritance for Your Family
It’s also important to consider how much inheritance you will give your family when choosing an equity release plan. You are essentially using the money locked into your home that would have normally been paid off in full.
You can opt for inheritance protection or give your family an early inheritance with your equity release money. Speak to your financial adviser about the matter.
Inheritance can come in many different forms, and it’s important to explore all options before making any decisions.
How Can I Avoid the Financial Consequences of an Equity Release Plan?
It’s crucial to explore all different options and understand both benefits and repercussions, so you know what you’re getting into with an equity release plan – this should include understanding how financial consequences like doubled debts or increased interest rates might happen if things do not go well.
What Steps Do I Need to Take if I Want to Avoid Doubling My Debts?
Suppose someone has a large mortgage and wants to avoid burdening their kids with debt.
In that case, it might make more sense for them to stay put instead of taking on even more risk – this could mean paying off part or all of a mortgage loan, so property owners are not giving away money while still having some financial stability left over for themselves as well as other loved ones/family members.
What Will Happen if I Cannot Repay the Loan Before It's Due in Full?
If someone is making payments on an equity release loan that cannot be repaid before the time runs out, they may have to start paying back more than what has already been paid off – this could mean doubling debts or other financial consequences.
How Does Negative Amortization Work With These Loans?
Negative amortization loans are a common feature of these equity release plans, which means if someone does not make enough payments towards the loan before the period is up, they may have to pay more than what has already been paid off.
It’s important to do your research. Be sure to explore all of the options available and always consult with a financial advisor before committing yourself to an equity release agreement.
You don’t want to be stuck in debt for years or decades. Equity releases are not right for everyone, but they can work out well under the right circumstances.