Equity release is a boon for homeowners that are struggling to make ends meet. It has been made possible through the equity they have built up in their homes over the years, and it can provide a much-needed lifeline when financial insecurity sets in. However, this type of transaction does come with risks.
There are many horror stories out there about how people have gotten themselves into debt by signing up for an equity release scheme without fully understanding what they were getting themselves into. This article will be looking at some of these horror stories so you know what pitfalls to avoid.
A Brief List of Different Equity Horror Stories
These are just some of the horror stories that have been reported where homeowners have not understood all of their options and what they were signing themselves up for. They should be used as a benchmark1 to understand what you need to look out for if an equity release plan is something you’re considering at this stage.
Avoiding these kinds of mistakes will ensure that your home stays yours and does not get taken away from you by creditors2. There’s nothing worse than seeing all your hard work go down the drain.
Negative Equity
People who have taken out equity release schemes with lenders like to point their finger at the subprime credit crisis as responsible for this. It has meant that many people are now stuck in homes they cannot afford because of negative equity, and it’s certainly something you want to avoid if you can help it.
Negative equity3 means that your home will not be worth what you still owe on any mortgage or other debt attached to it, making selling up a very complicated process. Try and avoid equity release schemes that have a negative equity clause in their contracts.
You want to be sure you’re going into it with your eyes wide open, so try and get as much information about the scheme from people who understand all of the ins and outs before signing any documents or taking out loans, as you don’t want to find yourself in this kind of position.
Debts That Double
It’s not unusual for people to take out equity release schemes and find that the debts they owe have doubled or even tripled. It can be a worrying time, but there are ways around it, so don’t worry too much if you think this might happen to you as well. Schemes such as lifetime mortgages will see your debt increase over time because of interest rates.
Still, by choosing a fixed rate option, you should keep the amount owed stable until other factors come into play, like inflation, which means you can pay back more than what was originally borrowed without increasing your original liability4.
The key is to know as much about the schemes you’re considering from people who have been in your position before, just so that there can be no nasty surprises further down the line when it might be too late for anything else but a lot of heartache and stress.
Compound Interest
Taking on equity release schemes that have compound interest rates5 attached to them is a big mistake many people make, and it can lead to your debt doubling or even tripling over time if you’re not careful.
Compound interest means the amount of money owed will increase as more time passes, which will mean higher monthly repayments and lower returns because less equity is being taken out for every payment made into the scheme.
Try and avoid any schemes with compounded variables attached to them, like taking out an endowment policy instead, as they tend to be better value in terms of growth potential.
However, do remember that some lenders will charge penalty fees for early repayment, so try and get everything explained clearly before signing up for anything just so there are no nasty surprises along the way.
Early Repayment Charges
This is a big mistake that people can make when trying to take out equity release plans. They think the only way of paying off their debts as quickly as possible will be by taking advantage of any early repayment schemes on offer, even if it means having to pay large penalty fees for doing so.
It’s very important not to fall into this kind of trap because you could end up being worse off than before, which makes getting good advice from someone who knows what they are talking about incredibly important indeed.
Try and avoid making decisions in haste just because there might be an attractive-looking early payment scheme attached to something, or ask other people whether your plan seems sensible or not first before signing anything at all costs.
Usually, these mistakes happen when people are under pressure to make decisions they don’t want to make because of debt problems.
Still, by doing your research and getting help from someone who knows what they are talking about when it comes down to the ins and outs of equity release schemes, you should be able to avoid making any big mistakes that could end up costing you more than just money.
No Inheritance for Your Family
This is another mistake that people can make when they are trying to get out of debt. They think the only way of doing so will be by signing up for equity release schemes, even if it means having no money left over once everything has been paid off because all their inheritance has gone into paying off the debts instead.
Still, you don’t want this kind of horror story happening in your life just yet as there are plenty of other ways around it, which mean you would still have access to some extra cash after selling your home and moving on with your life, perhaps a lump sum payment or monthly income from savings based products too.
Even though taking out one scheme might seem like a good idea, you should always try and get as much help from someone who knows what they are talking about before making any decision at all.
Otherwise, the mistakes might cost more than just money after all, which is why it pays to listen to other people’s stories before signing up for anything yourself, even if it means taking time out to make sure everything seems safe and sensible enough first.
Common Questions
What Is the Difference Between Compound and Simple Interest?
How Can I Ensure My Loved Ones Get the Inheritance They Deserve?
In Conclusion
If you’re considering an equity release, there are a few things to keep in mind. First off, make sure that the person providing your equity release is qualified and reputable. Don’t take out more than what’s necessary so as not to run into complications down the line when you want or need access to funds again.
Be certain of your intentions before deciding how much money should go towards this type of transaction because it can have long-term consequences on future financial stability if done incorrectly. Finally, always consult with experts before moving forward with anything.