Equity Release Pitfalls in 2022

Which 8 Equity Release Pitfalls Should You Avoid?
Contributors: Nicola Date, Katherine Read. Reviewed by Francis Hui
Do You Want to Avoid Some of the Common Equity Release Pitfalls? Discover 8 Key Pitfalls & What Makes Equity Release So Popular. We’ve Got the Scoop Right Here.

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Equity release can be a costly mistake, and this might be your reality if you aren’t aware of the common equity release 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, we’ve got your back. 

Knowledge is power, so read on to discover:

  • If equity release is worth the risks involved in Aug 2022.
  • What to discuss with your financial adviser and potential provider.
  • If equity release is the correct choice for you and your family.

We’ve combed the market, looked at over 220 plans, and narrowed down the common pitfalls to 8.

Before you make any concrete decisions, check out the equity release pitfalls in Aug 2022 you NEED TO KNOW!


Pitfall #1: Spending Money for Nothing

The main pitfall of equity release is the possibility of taking out more cash than you need.

If you do this, you will end up spending a lot of money for nothing. 

What’s more, with a lifetime mortgage, you will be charged more interest than what you will earn if the cash is in a savings account.

Pro Tip: Only release enough cash 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, as this is the most common form of equity release.

Another common form is a home reversion plan.

With a lifetime mortgage, it will usually be up to your family to pay back the loan plus rolling interest accumulated at a fixed interest rate.

Should you wish to, you can combat this compound interest by making small monthly repayments. But you are 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 value 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.

If you borrow when you are younger, your plan will likely last longer,

Increasing the amount of compound interest, and making it slightly riskier.

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 out 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.

In some cases, these can 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 first borrower dying or moving to permanent care.

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?

Equity release interest rates have continued to drop over the past few years!

You need to stay up to date with equity release news to see if you can switch your plan to one with better interest rates.

If you are not paying attention, you might end up spending more than you need to!

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Pitfall #6: You Miss Out on Increasing Property Market Values, and That Matters

A home reversion scheme involves you selling all or a portion of your home to a provider for a cash lump sum 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 it’s important to consider 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 value appreciation.

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. Some equity release schemes come with an ‘inheritance protection guarantee’.

This allows you to ring-fence off a portion of your home’s value which is guaranteed to be passed on to your beneficiaries when your property is sold.

Some equity release companies like Aviva and More2life in the UK provide you with even more security features.

Bear in mind that if you select a higher percentage of the provided security feature,

You’re more likely to get a reduced maximum loan amount when you apply for equity release.

If that’s what you need, then be sure to talk to your financial adviser for professional advice.

What’s the Catch With Equity Release?

Equity release plans give you a cash lump sum or a regular income. The “catch” is that the cash unlocked will need to be back when you’ve passed on or relocated to long-term care.

If you don’t voluntarily repay some of the loan or interest in your lifetime, the amount owed could be as much as your full property value.

Despite These Pitfalls, Is Equity Release a Good Idea?

Yes, equity release is a good idea if you opt for a lender that’s a member of the Equity Release Council and you’ve received confirmation from a trusted financial adviser.

Common Questions

Despite the Pitfalls, Why's Equity Release Popular?

Why Should I Still Consider Equity Release, Given the Pitfalls?

In Conclusion

While there are both pros and cons of equity release, the cons can be overcome if you understand the pitfalls.

Remember to gather every drop of information on what’s equity release in Aug 2022,

Find out how much cash is tied up in your property, and know the amount that 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, but be sure to avoid the common equity release pitfalls.

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Editorial Note: This content has been independently collected by the SovereignBoss team and is offered on a non-advised basis. SovereignBoss may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.