Equity Release Horror Stories

In order to fund their retirement and to cover existing debts, David and Jane Horton had an equity release scheme – a lifetime mortgage – recommended to them by a financial adviser.

However, just five years after taking out an equity release loan to the tune of £384,000, David passed away.

As her husband had handled the family’s finances up until his death, Jane had not been aware of their growing debt due to compound interest charges.

Jane decided to put the family farm on the market in 2020. At this point, she discovered that she owed the equity release lender a staggering £996,572. This was due to the original loan, 6.87% interest payments owed to Prudential over the years and £96,000 in early repayment charges.

According to a Guardian report, shortly after the death of an elderly woman in 2019, an equity release company gave her daughter just four weeks’ notice to vacate their family property.

In 1994, the mother had received a lump sum of money as part of a “home reversion” equity release scheme. Unlike a lifetime mortgage, equity release plans of this kind are not “loans” as such.

Instead, the borrower gives up a share of their home to the equity release lender. Upon the borrower’s death, the equity release provider then repossessed and took ownership of that portion.

In this case, the lender – who the daughter will not name in the article for fear of losing her remaining portion of the property – was to receive a 90% share.

In return, the organisation paid approximately £52,000 for the mother’s North London home.

While this was back in 1994, the property value would have been considerably higher than is reflected in this transaction.

Another real world example of the potential pitfalls of equity release is that of Bruce Mackie. His father, Ernest Mackie, went missing off the north coast of Aberdeenshire in the winter of 2011 and is presumed dead.

While dealing with a hugely challenging period in his life, Bruce discovered that Ernest had taken out three equity release loans with Aviva.

Ernest had released £62,000 – but compound interest had caused the amount to snowball to £142,500.

In order to help his mother escape from the growing debt, Bruce decided to pay off the loan by mortgaging his own home. However, he then discovered that there would be a substantial exit fee.

Initially, Bruce was quoted £22,000 to pay off the loan early. However, he spent a number of months attempting to persuade Aviva to drop the fee due to his family’s circumstances.

At the end of this period, the amount had grown to almost £28,000.

Can equity release affect inheritance? The equity release horror story of Lesley Coombe and her mother, which appeared in the Telegraph, reveals the very damaging effect that equity release may have on what your family may receive once you’re gone.

Lesley’s mother applied for equity release to the tune of £40,000 from her property in 2006. This enabled her to pay off the remaining mortgage on her property. However, at the time of writing, interest rates of 7% had resulted in the debt growing to £102,000.

The property itself is thought to be worth £115,000, which means that Lesley’s mother owes over 88% of her property’s value to the Prudential.

The lender will take over the property in its entirety when Lesley’s mother dies. As a result of this, her children will not inherit any of its value.

It’s also worth noting that state benefits may be affected by equity release, as it can be counted towards your savings and may raise them above the threshold.

Equity release can be even more of a nightmare when coupled with issues surrounding the age of retirement. Welsh resident Purita Somerville expected to retire in 2016 and had planned her finances accordingly.

However, the “equalisation” of the state pension age drastically changed her plans. This government action was due to be phased in over a decade from 2010. However, its pace increased after the introduction of the 2011 Pensions Act.

As a result of steps taken to bring the female age of retirement level with its equivalent for males, women born in the 1950s must now wait up to six extra years to receive their state pension.

Women Against State Pension Inequality (or WASPI), of which Purita is a member, was founded as part of a campaign against this.

Purita needed to subsidise her income in order to bridge the significant gap before her retirement. She felt that her only option was equity release.

She released £37,000 from her property – which is valued at £160,000 – by way of a lifetime mortgage. The loan came with a 3.8% interest rate.

As a result, her children are likely to receive no inheritance in the event of her death. However, she feels that she had no choice but to apply for equity release from her home in order to survive until she could access her state pension.

After many equity release horror stories coming to light over the years, the Equity Release Council was formed. This body serves to “promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart”.

You can check whether your provider is a member of the Equity Release Council by using their “find a member” section.

The Financial Conduct Authority (FCA)

It is worth noting that the equity release industry is regulated by the Financial Conduct Authority – so it is possible to report any misconduct to this body. You can help to prevent future equity release horror stories by notifying the body of issues that may affect others – while the Financial Ombudsman Service (FOS) may well be able to resolve your complaint favourably.

Unfortunately, the equity release horror stories reported in this article do not amount to misconduct. This is because the equity release borrowers in question have entered into an agreement that was entirely legal at the time.

However, you can protect yourself against experiencing similar issues by taking great care to research the means by which you choose to approach equity release.

Never take any legally-binding steps without securing the right guidance and information.

Firstly, you should discuss the matter with a financial adviser – and take care that they are independent. It is vital to seek unbiased equity release advice from financial experts.

In the first of the above equity release horror stories, the adviser ended up receiving £7,120 in commission from the Prudential for “selling” the scheme to the recipients.

Read everything related to plan you are considering for releasing equity, and get a professional second opinion on small print wherever you can. You should be confident that your equity release plan will not result in your owing more than you can afford.

You’ll also want to avoid being trapped in a lifetime mortgage agreement from which you can’t escape.

If your chosen provider is a member of the Equity Release Council, it is far less likely that they will be involved in any unscrupulous behaviour.

When looking into equity release, it’s important to consider your chances of entering negative equity.

Being in negative equity means that you owe more than your property is worth. It’s a major risk when taking out a lifetime mortgage.

Your arrangement should come with some form of “no negative equity guarantee” – as should most modern equity release plans. This means that the estate from which the equity has been released will never owe more than the property value upon sale. If you don’t see any information about this in the paperwork with which you have been provided, be sure to ask. Avoiding the risk of negative equity must be a priority at all times.

Many of the equity release horror stories we see in the press involve high early repayment fees. For this reason, it’s vital that you understand how much it will cost you to pay off your equity release loan when selling your property.

It’s also worth finding good fixed interest rates. This will help you to avoid a shock further down the line, as interest can fluctuate and may lead to significantly higher charges than you had anticipated.

Compound interest means that you owe interest payments on both a “principal” amount – say, for example, the equity release loan you’ve taken out – and on the accrued interest owed as a result of taking out that loan.

It’s a good idea to talk to your equity release adviser and to do your own research to work out how much you’d have to pay to avoid compound interest.

If you are on means tested benefits, you need to be aware that equity release may push you over the threshold stipulated by your provider.

Be sure to take care when looking into equity release to make sure that any released cash lump sum does not have long term implications regarding other financial support you are receiving.

Consider your existing mortgage, for example. You may be able to check with your current lender to ask about early repayment charges if you’re concerned about your financial health further down the line, or whether there is a way to change the terms so that you are making lower repayments for longer.

There may also be more cost-effective remortgage options.

You may even be able to swap out your existing mortgage for one that involves making only monthly interest repayments.

However, if you are on a fixed rate, you may incur early repayment charges when doing this. For that reason, you must do your research before you decide on this approach.

Take out a Personal Loan

This option may not be for everyone, but in many cases, personal loans are more straightforward to repay, as well as often being more affordable.

Be wary though, as they may affect your pension credit and/or your state benefits, leading to more horror stories.

You will also need to do your due diligence in terms of inheritance protection, too.

Some loans are also available without early repayment charges, opting instead for penalty free payments, but again, it’s important to read the fine print before you commit.

Downsizing is a great alternative for equity release that applies to any homeowner who does not mind relocating.

If you have enough equity in your existing property, you should be able to sell. You can then use the money from the sale to purchase a new home of lower value.

The amount left over will be a handy lump sum for you to utilise however you require.

Various options from a high street or online estate agency through to traditional property auction / modern method auction, private home buyer or as a cash sale if you’re looking for a speedier service.

You may also consider sale and rent back.

There is a small firm of companies that can buy your house or flat and then rent it back for a minimum of 5 years.

Be sure to check that the operation is fully regulated by the Financial Conduct Authority (FCA).

You may even decide to rent out your property if your personal circumstances allow.

Rent a Room, for example, is a government scheme available whereby you can earn up to £7,500 from tenants who pay rent to you without you having to pay tax on that amount.

As long as you are confident that you can cover all the costs and handle all of the responsibilities involved in hosting tenants, this may be a good alternative to releasing equity, without the extra burden of income tax.