Equity release horror stories: what went wrong?

Last updated: 28th October 2024

How to avoid your own ‘equity release horror story’

Written in line with our editorial policy.

If you have been thinking about unlocking some tax-free money from your home, you may have come across one or two equity release horror stories from days gone by. Fortunately, things are very different today, with strict rules and regulatory bodies in place to protect customers tapping into their property wealth.

That said, we know equity release horror stories from the past can still sow seeds of doubt in people’s minds. To help you make an informed decision, we’ll discuss the following in this article:

• What went wrong with equity release 30 years ago?
• Do equity release horror stories happen today
• Answering common equity release questions
• Is equity release safe?
• How to avoid the potential pitfalls of equity release
• What to do if you have been mis-sold equity release
• How to avoid an equity release horror story
• What are some alternatives to equity release?

What is equity release?

Before we discuss the equity release horror stories of days gone by, let’s take a quick look at what plans look like today. 

Equity release allows homeowners aged 55 or older to unlock some of the value tied up in their property without having to sell it. It typically comes in two forms: lifetime mortgages and home reversion plans. 

With a lifetime mortgage, the homeowner borrows a portion of the property’s value, while still retaining ownership. The loan plus accrued interest, is repaid when the homeowner passes away or moves into long-term care. 

Home reversion plans, on the other hand, involve selling part or all of the home to a provider in exchange for a lump sum or phased payments. The homeowner can continue living in the property rent-free. As with a lifetime mortgage, the provider is repaid via the sale of the home when the homeowner passes away or moves into long-term care.

As we explain below, modern equity release schemes are fully regulated and offer several safeguards. They therefore provide a suitable and secure financial solution for some over-55s looking for a cash boost.

What went wrong with equity release 30 years ago?

The equity release schemes available 30+ years ago were sadly very different to the gold standard plans sold today. Many equity release horror stories abound of unscrupulous lenders taking advantage of the unregulated plans that tarnished the market. 

One such story is the PR disaster faced by the relatively young industry in the late 1980s. As the Guardian reports, a scandal broke which saw customers faced with crippling debts and led to people asking “is equity release a con?”.

Hundreds – potentially thousands – of elderly homeowners were sold investment-linked home income plans to help them boost their finances in retirement. The plans required holders to mortgage their property and invest their money in a high-yield bond. Initially, the bond generated enough of a return to cover the interest on their loan, with some extra cash left over to use how they wished.

These schemes failed spectacularly when interest rates soared, stock markets collapsed and house prices tumbled. By the early 90s, many plan holders were facing enormous debts with interest continuing to mount. 

After the victims’ stories came out, compensation was awarded by the Financial Services Compensation Scheme. The industry took swift action to guarantee the safety of its future customers. Thankfully, these schemes have since been banned.

Do equity release horror stories still happen today?

Things have changed a lot since the equity release horror stories of decades ago. With clear Financial Conduct Authority rules and Equity Release Council standards in place for firms to adhere to, the industry now offers a trusted and highly regulated service to thousands of homeowners a year.

According to the Equity Release Council’s 2023 Full Year Market Report, more than 650,000 homeowners have accessed £46bn of property wealth via Council members to support their finances since 1991. The vital work of the Council helps to ensure that equity release scams remain a thing of the past.

Answering common equity release questions

If you are still wondering “is equity release safe?”, let us answer some of the most commonly asked questions surrounding equity release horror stories. We also look at how today’s stringent rules will protect you and your family.

Can I fall into negative equity?

One equity release horror story you may have heard surrounds the issue of negative equity. If you’re concerned that your equity release loan plus interest will grow to be more than what your home is worth, let us reassure you, it won’t.

All equity release plans approved by the Equity Release Council come with the guarantee that when your plan comes to an end, you will never owe more than the value of your home. The Council’s No Negative Equity Guarantee has been offering customers that reassurance and protection for many years.

Is compound interest something to worry about?

For many people a big advantage of equity release is that there are no regular repayments to make. Instead, the interest rolls up each month and adds to your total loan amount. Known as compound interest, it means interest accrues on interest.

The loan can grow quickly, but as the interest rate on lifetime mortgages is fixed for life, you’ll see a projection of what you can expect the loan to grow to before you apply for your plan. This way you can make an informed decision without any surprises in the future. 

If you wish to, you can prevent escalating interest costs by making voluntary partial payments to service all or some of the interest each month. Alternatively, you could select an interest-only equity release plan which allows you to pay off the interest in full each month, so your loan never grows. 

Will I have to pay early repayment charges if I want to pay off my loan early?

If you want to make partial payments to reduce your loan, then all Equity Release Council approved plans allow you to do this without penalty. Their code of conduct promises that “all customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty free payments, subject to lending criteria.”

Typically, lifetime mortgage lenders tend to allow partial repayments of up to 10% a year penalty-free. You could clear your loan in as little as ten years in this way. Some lenders even offer no penalty for early repayment in certain scenarios.

Equity release is typically considered a lifelong commitment, so if you decide to pay off all your plan in full early then you are likely to face early repayment charges. In the event that your circumstances change and you choose to pay off your loan in full, you will need to request an early settlement amount. This will include any early repayment fees that you might incur. 

This is one of the areas where it pays to talk to a qualified, FCA-authorised equity release adviser. They can explain early repayment charges in more detail and help you with your search for the most suitable plan. Call us on 0808 178 3055 or request a call back and we’ll arrange an appointment with one of our selected advisers. 

Will the interest eat away my children’s inheritance?

We all want to help our family through the difficult times, which makes that last gift to them – their inheritance – vitally important to many of us. By its very nature, equity release will reduce the value of your estate and the amount of inheritance you leave. It is perhaps why some are still being warned about equity release scams today by their children and grandchildren. Many are naturally concerned about the effect a plan might have on their inheritance.

However, it is reassuring to know that for homeowners who want to gift part of their estate to their loved ones one day, there are ‘inheritance guarantees’ available. These allow you to ring-fence a percentage of your home’s value. So when your home is sold when you pass away or move into long-term care, you know that your family will receive an inheritance.

Is equity release safe today?

As you can see above, there are significant protections in place which work to protect the financial future of you and your family when you take out a plan. In addition, anyone taking out a plan must receive the advice of an adviser registered with the Financial Conduct Authority (FCA) – the UK’s financial services regulator and watchdog. 

At Equity Release Wise, all our selected advisers are registered with and authorised by the FCA. In a further step to protect customers, they only recommend plans approved by the Equity Release Council (ERC). As the governing body for the industry, the ERC has a strict code of conduct that all members must abide by. These rules have protected customers for over 30 years, helping to ensure equity release scams remain a thing of the past. 

The ERC also have standards that its members must agree to:

• You have the right to live in your property until you pass away or move into long-term care.
• You can move your plan to another property as long as it meets the lender’s criteria.
• The ‘no negative equity’ guarantee mentioned above.
• You have the right to make voluntary, penalty-free partial loan repayments
• Lifetime mortgages must include fixed rates for each release. If you arrange a plan with a variable rate then this must be capped at a stated maximum level for the life of the loan.

You can read more about the five Equity Release Council guarantees.

Still wondering “Is equity release a con?”. Be assured, the protections offered by the FCA and the Equity Release Council provide vital safeguards for consumers. The measures they have put in place ensure that homeowners are fully informed and protected when considering equity release, with regulated advice and products that meet strict criteria. 

By adhering to these robust regulations, today’s equity release market offers reliable options, unlike what may have happened with unregulated schemes of the past.

How to avoid the potential pitfalls of equity release

Equity release is typically a lifetime commitment, so you should take the time to understand its pitfalls and potential solutions before making a decision. To help you make an informed decision, have a read of our short guide: The Pitfalls of Equity Release. 

Here are a few of the potential pitfalls to consider, along with some ways to manage the pitfall: 

Pitfall 1: The effect of compound interest

A big advantage of equity release is not having any mandatory monthly repayments to make on the loan. However, compound interest on a lifetime mortgage can grow quite quickly if you don’t make interest payments, which may be of concern to you.

Manage the pitfall: If compound interest concerns you, consider an interest-only lifetime mortgage. You can then make regular payments to prevent or minimise interest rolling up on your plan.

Alternatively, make voluntary ad hoc repayments of the loan itself to reduce the amount of interest that accrues. Some lenders let you make voluntary ad hoc repayments towards your original loan amount (typically up to 10% each year) without incurring penalty charges.

Also, regularly reviewing your finances may help you spot opportunities to make extra payments when you can.

Pitfall 2: Your entitlement to state benefits

If you rely on state support then do consider that equity release may affect your entitlement to some means-tested state benefits. These are benefits such as Universal Credit and Pension Credit where your eligibility may be affected if your income and/or capital is above a certain amount. With that in mind, a large amount of cash arriving in your bank account could impact your eligibility. 

Manage the pitfall: Consider a drawdown lifetime mortgage where you draw smaller amounts in stages rather than a single lump sum. This approach can help keep your savings below the level where your benefits are affected. 

It will also help to speak with an adviser who understands how equity release could impact your state benefit entitlement, so you can make informed decisions. Additionally, having a benefits check is advisable before proceeding with equity release. You may discover you’re entitled to extra benefits that could alleviate your financial situation, reducing the need for equity release altogether.

Pitfall 3: Less inheritance for loved ones

Equity release will reduce the value of your estate because you are taking some of the value of your home to spend it now, while you still live in it. 

In addition to this, interest will typically accrue on a lifetime mortgage and it can grow quickly. This means that when you pass away, there will be less money for your family to inherit. 

Manage the pitfall: Discuss this concern with your equity release adviser, who will help identify the right solution to balance your immediate needs with future inheritance goals. For example, you might choose a product with inheritance protection to ringfence a percentage of your home’s value to guarantee a minimum inheritance for your family.

Another step is to communicate your decisions with your family so they understand how your estate will be impacted and can plan accordingly. If they have concerns about equity release scams, being open and honest about your needs and how a plan can meet those needs will reassure them. You may even find they can help you out financially so a plan isn’t necessary.

You can also select an interest-only lifetime mortgage to prevent or reduce interest from building up and reducing your estate more than you wish.

Pitfall 4: Early repayment charges

As with any mortgage product there might be potentially expensive early repayment charges (ERCs) if you decide to repay your lifetime mortgage early. However, some providers do offer exemptions in certain circumstances. For instance, when repayment takes place soon after the first homeowner passes away, or if you move your plan to another suitable property.

Manage the pitfall: If you think you might want to repay your plan early one day, do tell your adviser during your appointment. They can find a product that works best for your situation, such as a plan with no early repayment charges, or short fixed-term ones.

You can also inquire about plans that offer more flexible exit strategies, like downsizing protection, which may allow you to repay the loan without penalties if you sell your home and move to a smaller property. Be sure to understand the specific terms and conditions around early repayment charges before making a commitment.

What to do if you have been mis-sold equity release

Equity release is fully regulated to ensure customers receive the highest level of protection and to prevent equity release horror stories from occurring. If you feel that you have been mis-sold equity release then you should first file a formal complaint to the lender who sold you the scheme.

If you go through your lender’s complaint procedure and are not happy with their response then you can raise your complaint to the Financial Ombudsman Service. They will review your case and make a decision on whether compensation should be awarded or not.

For further information visit the Financial Conduct Authority (FCA) website, which provides useful ‘How to complain’ information.

How to avoid an equity release horror story

The fact that you are reading this article shows that you are doing your research and taking care not to rush into anything. To avoid your own equity release horror story from happening, you may want to speak to a qualified equity release adviser who can explain everything to you. 

At Equity Release Wise, we can connect you with our carefully selected FCA-authorised equity release advisers who will provide all the trusted, expert advice you need. Better still, all the initial advice you receive is entirely free of charge. Only if you decide to go ahead with a plan will you incur a fee for advice, payable from the money you release.

There are hundreds of plans available today with a wide range of options to choose from. Our selected advisers can recommend the best option for you after asking a few straightforward questions. They’ll be able to search leading providers for your perfect plan in a matter of minutes, all from the comfort of your own home.

We hope in this article that we have been able to address any concerns you might have had, such as “is equity release safe” or “is equity release a con?”. If you have any other questions, you can speak to a friendly member of the Equity Release Wise team today. 

As part of the service, we can arrange all the free initial guidance and competitive quotations you need with one of our selected advisers. Call us for free on 0808 178 3055 or request a call back to find out more about equity release, what it can do for you, and the measures in place to protect you.

What are some alternatives to equity release?

Equity release isn’t right for everyone and you might find that one of the alternatives is actually a better idea for you. That isn’t to say equity release should be ruled out entirely, but you might find that you can meet your current financial goals in another way until you come back to equity release later in life.

Here are some of the main alternatives to equity release:

• Using your savings
• Selling your assets
• Accessing grants
• Checking your benefit entitlements
• Remortgaging
• Retirement Interest Only (RIO) Mortgages
• Downsizing
• Asking family and friends
• Take in a tenant or lodger

You can read more about each of the above alternatives to equity release here.

About Clare Yates. With over a decade’s experience writing about later life financial planning, Clare offers a wealth of knowledge about equity release, pension annuities, wills, LPAs and more. When she isn’t writing, Clare likes to spend her time baking and going on walks with her husband, two children and their rescue dog. Follow Clare on LinkedIn