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John Lawson
John Lawson
Last Updated: 27 Sep 2020
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Important Facts About the Pitfalls of Equity Release

I think you’ll agree with me when I say…

There’s no financial product that is 100% perfect, and even though equity release saves your life from financial stress, it does have its cons.

Well, after more than ten expert consultations and hundreds of consumer reviews, here is a comprehensive article on the drawbacks of taking out a cash equity release from your home.

If you wonder what are the pitfalls of equity release, read this article.

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What are the Pitfalls of Equity Release and What You Need To Understand

So, if you’ve paid off your home, or even say, 60% of your mortgage1  for your property, a provider can help you in releasing some of the equity in your home, without you having to move out. This is a form of getting your hands on some extra money to top up your pension, pay off debt, pay off other loans, start early retirement, work on that fantastic conservatory you have been planning on, go on the vacation with your children, and the rest of your family. 

All Equity Release Providers Approved by 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:

1. There is ’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.

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.

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.

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 is best to get advice from the proper people who care and will get you the right information.

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.

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.

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 is, which option perfectly suits you for your home.

Why Equity Release Might Not Be Your Best Financial Decision 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 just the UK numbers. There are other mortgage types, such as a retirement interest-only plan if that is what you need as well.

Enjoy More Articles From Us

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 release and how does it work or more of our many other articles.

Common Questions People Ask

What Are The Pitfalls Of Equity Release?
Is Equity Release A Safe Option?
Is It Wise To Release Equity?
Does Equity Release Affect Your Pension?

How much money could you release?

An equity release allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.

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John lawson rndlg

John Lawson

John advises business, individuals, and organisations on pension planning. As you’ve probably realised by now, we’re invested in helping people like yourself understand a little bit more about how equity release options work.
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