Equity release can be a costly mistake, and this might be your reality if you aren’t aware of the pitfalls!
You could find yourself in serious trouble. Don’t be the next homeowner to unlock equity, only to regret it later.
Don’t worry, and we’ve got your back. Knowledge is power, so discover:
- If equity release is worth the risks involved.
- What to discuss with your financial adviser and potential provider.
- If equity release is the correct choice for you and your family.
We combed the market, looked at over 220 plans, and narrowed down the pitfalls to 8. Before you make any concrete decisions, check out the equity release pitfalls you NEED TO KNOW!
What You MUST Know
Before you continue reading, check out this quick video that explains equity release in a nutshell:
Pitfall #1: Spending Money for Nothing
The main pitfall of equity release is the possibility of taking out more cash than you need, as you will end up spending a lot of money for nothing.
With a lifetime mortgage, you will be charged more interest than what you will earn with the cash being in a savings account.
Pro Tip: Only release enough to cover your foreseeable expenses in the next 2 to 3 years, plus have a pre-agreed reserve for the future.
Pitfall #2: The Lifetime Mortgage Compound Interest “Catch”
When releasing equity from your home, you will likely go with a lifetime mortgage, with this being the most common form of equity release. The other most common form is a home reversion plan.
With a lifetime mortgage, your family will be due to pay back the loan and rolling interest accumulated at a fixed interest rate. Should you wish to, you can combat this compound interest by making small monthly repayments. You are, however, not obligated to do so.
Here is an example:
Let’s say you release £50 000 from your home at an interest rate of 5%. In the 1st year, the interest charged will be £2 500. Whereas by year 10, the interest charged will increase to £3 878.
However, based on steady property growth in the past, the value of your property is also likely to increase with time.
Note: Interest will only be charged on your equity release balance and not on any property increases.
Pitfall #3: Releasing Equity When You Are Younger
When it comes to equity release, the older you are, the more money you will be able to release from your home, and the lower your interest rates will be.
In addition, if you borrow when you are younger, your plan will likely last longer, increasing the amount of compound interest. Therefore, making it slightly more high risk.
Pitfall #4: Early Repayment Charges
We don’t always know where life is going to take us. You might release equity from your home, only to later find that cancelling the plan is your only option due to life changes.
If you cancel your plan before you die or move into permanent care, you may have to cover hefty early repayment charges.
These charges can differ from one lender to another, with some having fixed penalty charges over a set period. These can, in some cases, be as much as 25%.
Luckily, there are 2 early repayment exceptions to look out for:
- Downsizing protection allows you to repay the loan when moving to a new home.
- Significant Life Event Exemption allows you to repay the loan within 3 years of the death or move to permanent care of the 1st borrower.
Be sure to enquire about these rates before selecting your equity release plan.
Pitfall #5: The “Setup & Forget Catch”
A lifetime mortgage can sometimes be a “setup and forget” situation, causing you to overpay with time.
How can this be?
If you are not paying attention, you might end up spending more than you need to!
Pitfall #6: 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 for how much cash lump sum you can release and the right to remain living there. It’s essentially shared ownership of the house.
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, they will get a share of the proceeds.
This means that you and your loved ones will not benefit from the full upsurge in the property’s cash. For example, if you were to 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 equity release advice from the proper people who care and will get you the correct information.
Pitfall #7: Your Benefits Are Affected So Be Aware
By getting income from your equity release, you will be more cash-rich. This might harm your eligibility for means-tested benefits.
Pitfall #8: 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. You can secure a portion of your securities with the current lifetime mortgage holdings option, ‘the inheritance protection.’
Some equity release companies like Aviva and More2life in the UK provide you with way more security features. 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 security feature, 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 professional advice.
Got Questions? Check These First
Despite the Pitfalls, Why's Equity Release Popular?
Despite the pitfalls, equity release is popular because it’s a reasonably risk-free way to unlock cash to live a financially free retirement.
As long as you know the terms and conditions, work with a trusted financial adviser, and think carefully about your decision, the pitfalls shouldn’t impact you too majorly.
Won’t My Debt Just Pile Up in the Long Run?
While there is rolling interest with equity release, you are not obligated to make any payments in your lifetime.
In addition, the ‘no negative equity’ guarantee will mean that your family will never owe more than the value of your estate, despite any property price decreases.
Why Should I Still Consider Equity Release, Given the Pitfalls?
You should still consider equity release as it’s regulated by the Equity Release Council, meaning that your rights as a consumer are protected. Equity release is a great way to unlock the money tied up in your home.
How Does the Equity Release Council Protect Me?
The Equity Release Council (ERC) will protect you by ensuring that all equity release lenders follow a strict set of protocols. Their rules are designed to protect the consumer and prevent fraud.
While there are certainly pros and cons of equity release, they can be overcome if you understand the pitfalls.
Remember to gather every drop of information on what’s equity release, find out how much cash is tied up into your property, and know the amount you can release.
Do you own your home and dream of having a financially stress-free retirement? Equity release might just be the answer for you.