There are no guarantees to any financial product – even when they offer you the financial freedom you want. There will always be risks and disadvantages that you need to be aware of.
Read our comprehensive article on the drawbacks of taking out a cash release from your home. This advice has been made available to you after consultations with more than ten experts and by taking into account hundreds of consumer reviews.
If you’re wondering what are the pitfalls of equity release, read this article!
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What You Need to Understand
So, if you’ve paid off your home, or even, 60% of your mortgage1 , a provider can help you in releasing some of the equity in your home, without requiring you to move out. This offer you some extra money to top up your pension, pay off debt, pay off other loans, start an early retirement, work on that fantastic conservatory you’ve been planning on, go on vacation with your children, and the rest of your family.
The Equity Release Council
Will include what’s known as the No Negative Equity Guarantee in their plans. But this might be a good way to unlock some money for you.
However, in as much as equity release is one of the best financial products, this is not for everyone. Therefore a vital form that you way up the benefits of equity release before you raise cash this way and think about where you are in life, if you need this loan, and your long term goals.
To aid you in making an informed decision for your family about the money, here are some of the reasons and issues why equity release can be a bad remedy for you and your money situation.
What are the Pitfalls of Equity Release?
These are the pitfalls you need to be aware of before deciding on an equity release plan.
Pitfall #1. There’s ’Rolled Up’ Interest in your Mortgage for your Home
With lifetime mortgages, one of the most common plans, you get to borrow cash against how much your property is worth at a fixed rate of interest.
Since most people prefer it to home reversion interest because you don’t have to make any monthly interest money repayments over the life of this plan, the interest is ‘rolled up’2 and added to the final compensation when your lifetime mortgage is due on the home.
It also doesn’t help that the longer the term money situation, the higher the interest amount.
You can, however, choose to keep the level of interest to be remunerated again to a minimum by opting to either withdraw equity (the drawdown lifetime mortgage3 ) or by doing consistent or one-off capital (the lump sum lifetime mortgage), or both!
It all depends on your provider, and thus, be sure that he/she explains the potential option to you about the interest and gives you the best advice.
Pitfall #2. You Get a Reduced Inheritance
Equity release reduces the merit of your securities, meaning a reduced provision for your heirs.
That said, you shouldn’t be panicking. It’s possible for you to secure a portion of your securities with the current lifetime mortgage holdings option, ‘the inheritance protection.’
Some equity release providers like Aviva and More2life in the UK provide you with way more safety features. When you select the fraction of the estate is worth you wish to safeguard; these pitfalls of equity release schemes allow for a quota of the home worth to persist on the eventual sale.
Moreover, if you select a higher percentage of the provided safety, then you’re more likely to get a reduced maximum loan quantity available at inception.
If that’s what you need, then be sure to talk to your financial adviser for advice.
Pitfall #3. Limits to the Amount You Can Release
As of late 2018, most homes increased it’s appraisal by about 20% for different circumstances, especially with the increased population levels and economic inflation.4
So, while you might currently have an impressive quantity of equity in your holding of the property, the quantity you can release could be considerably less.
Most equity release scheme providers typically have to wait decades before they are repaid, and as a result, the “discounts” that apply to the amount available can be shocking.
Moreover, the younger or healthier you are when you sign up, the less equity available to unlock from your home.
Pitfall #4. You Miss Out on Increasing Property Market Values, and that matters
The home reversion comprises of you selling all or a portion of your home to a provider, in return for a cash lump sum and the right to remain living there. It’s shared ownership of the home. The lump sum cash from your home could be something you need but think about the negative equity.
When your provider decides to sell the holdings, however, they will get a share of the proceeds.
What this means is that you and your loved ones will not benefit from the full upsurge in the cash of the property. For example, if you were to probably sell a 50% stake in your estate to an equity release provider, you would only see 50% of any future house-price upturns.
This is why it’s best to get advice from the proper people who care and will get you the right information.
Pitfall #5. There Are Early Repayment Charges you Need to Know To Be Safe
Lifetime mortgages, as their name precedes them, are not designed to be paying during your lifetime during the ownership of the property. And if you are not prepared it could put you in debt, fast.
Subsequently, they can potentially have impressive fast repayment dues if you want to repay them before you die or move into long term care, which might put you in debt. So depending on your income if this would be a good option or not for this loan.
That said, however, most of the new plans come with fixed-term advance arrangement paying, which means that with a few years in, you can change and decide to close it.
Pitfall #6. Your Benefits Are Affected So Be Aware
By getting released the equity from your holdings, you automatically increase your income or savings. However, this might have adverse effects and affect your claim to your means-tested benefits.
Pitfall #7. You May Have Fees to Pay, Don’t Be Alarmed
If you need additional capital to cater to your needs in retirement, equity release is an appealing personal remedy. However, it’s worth finding out about other options given the fact that there are certain interest charges.5
You can opt to either downsize to a smaller home or try borrowing some money from your trusted friends or family members to help if they don’t mind. Get more information on these options by checking out our ‘Alternatives to Equity Release’ articles too.
With various equity release schemes, you may have to pay some costs like the initial dues, which include: financial advice tax, solicitor’s tax, and lenders tax, together with holdings valuation tax. The amount you pay, however, is dependent on your choice of company for your house mortgage in the UK.
You might also want to consider getting impartial specialist advice about whether equity release is suitable for you, and if it’s, which option perfectly suits you for your home.
Why Equity Release Might Not Be For You?
Your home is a place of safety, serenity, and for many, and security. Almost 40,000, 55+ homeowners in the UK, have been using their estates to boost their finances for their property. And that’s the UK numbers. There are other mortgage types, such as a retirement interest-only plan if that is what you need as well.
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Common Questions People Ask
Equity release is an incredible financial plan. However, it has some cons which include, but aren’t limited to:
- You don’t release the full market value of your property
- It reduces the amount of inheritance you can leave for your family
- It subjects you to hefty fees
- You don’t benefit from the increasing estate values
- It affects your entitlement to means-tested benefits
- You might pay early repayment charges
Learn More: Pitfalls of Equity Release
While there might not be any significant dangers or pitfalls of equity release, you need to understand that it reduces the amount of inheritance you leave.
However, these plans differ from the standard bank loans for homeowners since you don’t have to make any monthly repayments unless you want to.
Learn More: Is It A Good Idea?
Equity release could be an excellent idea if you wanting to access the value of your home, without worrying about repayments.
However, it may not be such an great idea if you do not like the idea of your family’s inheritance being affected.
Yes, equity release products are secure since they’re regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC). They also come with the negative equity guarantee that protects your heirs from paying more than the initial worth of your home.
Learn More: is equity release a safe option for me?
Luckily, equity release doesn’t affect your state pension. However, the guarantee credit part of your pension credit (the amount that tops up your state pension to increase your weekly allowance) income can be affected.
Learn More: Pitfalls of Equity Release
We really do have long term care about your life, please make sure you ask for advice and put yourself in debt. Read our article Equity Release Process and what is equity Home or more of our many other articles.
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