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John Lawson
John Lawson
(Rated from 252 reviews)
Last updated 09 July 2020

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 to taking out an equity release.

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

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  • What is equity release?
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Taking Out An Equity Release

So, if you’ve paid off all, or even say, 60% of your mortgage1 , a provider can help you in releasing some of the equity in your home, without you having to move out. That means you could get your hands on some extra money to top up your pension, work on that fantastic conservatory you have been planning on, go on the vacation of your dreams with your partner or give a living patrimony to your children. 

However, in as much as equity release is one of the best financial products, this is not for everyone, and therefore vital that you carefully weigh up the benefits of equity release before you raise cash this way.

To aid you in making an informed decision, here are some of the reasons and issues why equity release can be a bad remedy for you:

1. There is ’Rolled Up’ Interest

With lifetime mortgages, one of the most common plans, you get to borrow cash against the value of your securities at a fixed rate of interest.

Since most people prefer it to home reversion because you don’t have to make any monthly interest 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.

It also doesn’t help that the longer the term, 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 in smaller chunks over time (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, you need to be sure that he/she explains the potential to you.

2. You Get a Reduced Inheritance

Equity release reduces the value 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 guarantee.’

Some equity release providers like Aviva and More2life provide you with this safety feature. When you select the fraction of the estate value you wish to safeguard; these pitfalls of equity release schemes allow for a quota of the securities value to persist on the eventual sale of the holdings. Moreover, if you select a higher percentage of the provided safety guarantee, 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.

3. Limits to the Amount You Can Release

As of late 2018, the value of most homes increased 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, 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.

4. You Miss Out on Increasing Property Market Values

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.

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 value. 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.

5. There Are Early Repayment Charges

Lifetime mortgages, as their name precedes them, are not designed to be paying during your lifetime.

Subsequently, they can potentially have impressive fast repayment dues if you want to repay them before you die or move into long-term care.

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

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

If you need additional capital to cater to your needs in retirement, equity release might be 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. You can get more information on these options by checking out our ‘Alternatives to Equity Release’ article.

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.

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.

Why Equity Release Might Not Be Your Best Financial Decision

Homes have been a place of safety, serenity and for many, in recent times, security. probably for this reason that almost 40,000, over 55+ homeowners in the UK, have been using their estates to boost their finances.

Common Questions

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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