It's a known truth; equity release has a bad reputation. But why are there so many horror stories, and could you have one of your own?
There are horror stories about equity release. However, many of these stories cannot repeat with modern-style equity release. This is thanks to the introduction of proper regulation by the Financial Conduct Authority (FCA), the requirement for independent legal advice, and product changes in the market.
Although it can be a scary time looking into equity release with what you have heard in the past, our mission is to dispel some of the myths about modern equity release and make you fully aware of the risks involved.
Top equity release horror stories
Let's look at three equity release horror stories and fully break them down to understand what happened and how it can be prevented.
Horror Story 1
"The shock bill, which experts say shames the equity release industry, included more than £500,000 in interest charges and an exorbitant £96,000 early exit penalty. It left Jane with little more than half the proceeds from the sale of the farm."
What exactly happened?
In an article from thisismoney.co.uk, a couple had taken an equity release lifetime mortgage of £384,000 in 2008. In 2013, Jane's husband, David, passed away in a riding accident. After eight more years, Jane wanted to sell the farm to downsize. However, she was hit with over £500,000 in interest costs and a £96,000 early repayment charge.
It is also mentioned in the article that Jane and David didn't benefit from modern-style protections. These include both the significant life event exemption and downsizing protection, which could have saved Jane £96,000.
Significant Life Event Exemption
Nowadays, many lifetime mortgages include this plan feature. It allows you to repay the balance without incurring an Early Repayment Charge if one borrower passes away or moves into long-term care.
We often recommend plans offering the Significant Life Event Exemption for joint borrowers. Typically, you won't know how you will feel when a spouse or partner passes away until it happens. It provides extra safety that could save you several thousand in Early Repayment Charges - £96,000 in Jane's case.
Many plans on the equity release market offer downsizing protection, but there are two types. I will focus on the suitable type that could have saved Jane £96,000.
Downsizing protection allows you to repay the equity release balance without incurring an Early Repayment Charge after having your plan for five years.
This waiver includes buying a new property, moving in with family members, moving abroad, or moving into rented accommodation.
So when Jane decided to move, she could have sold the farm, repaid the equity release (including interest charges) and used the rest of the proceeds to buy a new home.
Are all Early Repayment Charges (ERCs) so large?
No, Jane was unfortunate that she had the largest ERC possible for her - 25% of the initial amount borrowed. This is from a variable Tearly repayment charge structure based on gilt redemption yields.
All lenders in the modern equity release market now offer known fixed ERCs, so you always know what the Early Repayment Charge could be.
Instead of 25%, the maximum ERC of all fixed structure plans is 10%. However, these decrease with time and typically only last for eight, ten or fifteen years.
Therefore, with most modern plans, Jane would have avoided an ERC; even if she had to pay, it would have been far smaller.
The interest rate associated with the plan was 6.87%, which is higher than average, but still lower than some plans available today.
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Although we can't be sure if it was suitable for Jane, with a modern plan, she could have made payments towards the balance without incurring an Early Repayment Charge (ERC). Usually, this is up to 10% of the amount you borrowed each year. However, some plans allow you to pay up to 20% or even 40% yearly.
This can be a great way to reduce the interest roll-up from the outset of the plan. If you have the surplus income, you could even pay towards the capital and reduce it over the years, similar to a repayment mortgage.
Horror Story 2
"Thinking of taking out equity release? Meet the retired couple who must pay Aviva £135,000 to spend their last years together"
This headline from thisismoney.co.uk sounds scary, so let's look at it thoroughly and see how equity release might have changed in recent years to help their situation.
Roy and Jean took an equity release of £43,000, which since 2003, increased to £119,000.
Sadly, Roy's health deteriorated, and Jean struggled with her eyesight. They decided to sell their home and move into sheltered accommodation to help them.
However, this triggered an Early Repayment Charge (ERC) of £16,430. The lender deemed Roy to require long-term care, but Jane did not, which meant their plan did not end naturally.
As we have looked at, Roy and Jean could have saved themselves the £16,430 ERC using the Significant Life Event Exemption. The waiver would have been triggered by only Roy requiring care rather than both of them.
The interest rate
The interest charged on this lifetime mortgage was 7.10%, higher than almost all lifetime mortgages nowadays.
Similar to the previous horror story, if Roy and Jean had taken a modern-style equity release, they could have made payments towards the plan, reducing the interest roll-up.
Horror Story 3
"We'd need to pay the bank £255,000 on the sale for borrowing just £41,250 12 years ago, and so can't buy a replacement home".
John says in an article written by The Guardian in 2009.
The amount it has cost the customer seems tremendous, but why is it so much?
We've discussed lifetime mortgages but have yet to touch on Shared Appreciation Mortgages (SAMs). And they shouldn't be forgotten, as many of the horror stories you hear will be referring to SAMs.
However, I want to inform you that you can no longer get a SAM, as they have been removed from the equity release market.
So how do they work?
A shared appreciation mortgage involves receiving a lump sum of cash on which you are not charged interest. Instead, the lender benefits from a percentage of the future house price increase.
In John's case, the lender takes 75% of the appreciation. Although this was agreed upon when John took the plan, he is shocked by the amount required to be repaid (and I would be myself).
These plans were sold in 1996 and 1997 before a dramatic increase in property prices was unforeseen.
The companies that arranged them have made huge profits, but it was a risk they took.
See, if house prices fell, remained static, or slowly increased as we have seen in recent years, it would have been a cheap way to borrow money without monthly repayments.
Equity Release horror stories 2022
Published by The Telegraph last year, the headline reads.
'Aviva charged me £22,000 to cancel Dad's equity release loan even though he's presumed dead'
Ernest Mackie was last seen in 2011 and is presumed dead after an extensive search was carried out.
After dealing with the sudden loss, Ernest's son discovered his father had taken out a lifetime mortgage in three separate advances, dating back to 2001. The £62,000 total had increased to £142,500.
"I quickly cottoned on to how these horrible things work," Mr Mackie said, "and I realised that if my mother, 75 at the time, lived another 10 or 15 years, the debt would grow to as much as £320,000 and there would be no equity left in the home."
Although Mr Mackie could have been right, most people would also expect property prices to increase over the next 15 years, so there should be some equity left in the home.
However, Mr Mackie wanted to stop the balance from growing further, so he decided to repay the loan.
Mr Mackie expected Aviva to waive the ERC due to the unforeseen circumstance of his father tragically passing away. However, as his mother planned to continue living in the property, there was no trigger to repay the balance.
As we have looked at, the £22,000 fee is from a variable style ERC structure, which is far less common in the equity lease market nowadays. Instead, all lenders now offer a fixed structure, so you know what the ERC would be at any given point.
With a modern-style lifetime mortgage, the plan would likely come with the significant life event exemption. This would have waived the ERC when Mr Mackie's father passed away, which is ultimately what Mr Mackie was trying to accomplish.
Mis-sold equity release
There have certainly been some forms of misselling equity release by financial advisors in the past.
- The customer did not require equity release but was still recommended it
- A better alternative is available and was not recommended it
- A more suitable equity release product was available and was not recommended it
Unfortunately, this occurred far more often in the past, but why not so much anymore?
Equity release became fully regulated on 6th April 2007, initially by the Financial Services Authority (FSA) and later in 2012 by the Financial Conduct Authority (FCA).
The FCA regulation has strict guidelines on how advisers, solicitors and lenders must act.
Suppose a firm is found not to be following these guidelines. They can be shut down, and individual advisors and directors can be guilty of financial misselling, which is a serious offence.
Further to the introduction of proper regulation, the Equity Release Council was formed. This trading body for equity release ensures its members act in the customers' best interests. It also provides extra safeguards, most notably the no-negative equity guarantee.
This guarantees the lender can never request more money to be paid back to them than what the house is worth, ensuring your family does not have to pay from their own pockets.
For your safety, I will only recommend equity release plans which meet the Equity Release Council product standards.
Pitfalls of equity release
In this section, I will focus on the most common type of equity release, lifetime mortgages.
Taking too much money
A common pitfall that is helped avoided by a trusted advisor is taking too much money.
With a lifetime mortgage, you are charged interest on the money you borrow, even if you are not making monthly repayments. Therefore if you take excess money out of your property, you will be paying more than you will earn interest on it in a savings account.
What's more, the interest rate charged generally increases as you borrow more money from your home.
For these reasons, I suggest you only release enough money to cover your expected outgoings for the next two to three years.
Should you expect to need money after this, you can always look to add a pre-agreed reserve to your lifetime mortgage, which you can access when you need it.
Please see my guide on drawdown equity release plans to learn what they are and how they can save you money.
If you receive means-tested benefits, you could lose your entitlement by taking an equity release.
A means-tested benefit is any you receive based on a low income.
- Council Tax Reduction
- Universal Credit
- Child Tax Credit
- Housing Benefit
- Income Support
- Income-based Jobseeker's Allowance (JSA)
- Income-related Employment and Support Allowance (ESA)
- Working Tax Credit
- Pension Credit
The lump sum of cash paid to you when you take equity release is classed as a loan rather than income. Therefore, you must not declare it to your local benefits office / DWP as income.
However, if the money is held within your account for an extended period, it will be considered savings.
You could lose your entitlement if you have savings above certain thresholds (depending on the benefit you receive).
Again, this is where drawdown plans can be helpful.
Reducing the value of your estate
Horror stories of equity release are often not from those who have taken equity release but instead from their beneficiaries.
Equity Release will likely reduce the value of your estate, and as children are the most common beneficiaries of an estate, the amount they receive may be impacted - which some are unhappy about, especially when they aren't aware of it.
This can be helped in two ways.
Before taking it, you can inform your beneficiaries of your plans for equity release. They will be able to share their opinion, which is almost always supportive.
Secondly, you could make payments towards the plan.
As we have looked at, most plans allow you to make 10% payments against the plan each year without incurring an Early Repayment Charge.
It can be a great way to reduce the impact equity release has on your estate, even if you cannot afford to make the full 10% payment every year.
If you have further questions, why not speak with one of our qualified advisors?
Call us on 0207 158 0881 or use our online form to book your FREE consultation.
While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor tax advice and should not be relied upon.
To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.
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