If you’re over 55, an equity release mortgage is an appealing way to access cash for your retirement. There’s likely to be a lot of money tied up in your property, and this could be released and used to pay for other things instead.
However, equity release mortgages aren’t without issues, and the spectre of mis-selling is becoming a significant concern. Here’s more information.
Equity release mortgages – a brief overview
There are two ways to release your home’s equity:
- Home reversion. A home reversion scheme requires you to sell some or all of your property. In return, you’ll receive money – either in instalments or as a single payment.
- Lifetime mortgage. In this instance, you can borrow cash against the value of your property, and you retain complete ownership of it.
The lifetime mortgage is the more popular form of equity release. The money you take out as equity is paid back in the future; usually after your death or if you have to move into a care home.
The key issues with equity release mortgages
Equity release mortgage mis-selling is increasingly being discussed - but it’s not the only issue associated with this financial product. Here are a few others.
- It’ll affect your benefits. By taking out a lump sum of money, you may find that you’re no longer eligible for certain means-tested benefits. Examples of benefits that could be affected include: Jobseeker’s Allowance, Pension Credit, Income Support, Universal Credit, Council Tax Support, and Employment and Support Allowance. It’s your financial advisor’s job to go through these benefits with you, to work out what your best option is (based on your specific requirements).
- You may take out more than you need. When working out how much equity to release, it’s easy to over-estimate what you need for the future. The temptation to factor in unnecessary expenses like holidays is difficult to resist. However, equity release mortgages aren’t a good option for funding a lavish lifestyle. By taking out too much, you’ll have to pay back more interest – and there are likely to be less costly ways to fund your getaways abroad.
- There may be extra fees involved. Your financial advisor should detail all the fees involved in taking on an equity release mortgage. For example, it’s common to have to pay a set-up fee, and to incur a redemption fee if you want to pay your mortgage debt off early. Your advisor should also tell you what happens if you’re unable to make the repayments. If they fail to provide you with the right information, this counts as mis-selling – see below for more details.
- You can’t take out any further loans. Once you’ve agreed to an equity release mortgage, you won’t be able to take out any additional loans against the property.
- Your home won’t be included in an inheritance. After you pass away (or move into residential care), your property is likely to be sold, in order to pay off the debts of the mortgage. This means that your loved ones won’t inherit the home in its entirety. However, they may inherit a reduced portion, if there’s any money left over after the debt has been cleared.
The risk of being mis-sold to
Any financial product can be confusing to understand. It’s sometimes difficult to get a grasp of the fees involved, or understand exactly what happens with regards to repayments. It’s a financial advisor’s responsibility to cover the following when recommending an equity release product to you:
- Questions relating to your current financial situation
- The amount of equity you should release
- Your financial goals are for the future
- The amount you’ll be paying in fees
- Your other options
Equity release mortgage mis-selling is becoming increasingly more of an issue. Financial advisors are sometimes incentivised to recommend a particular mortgage product, for example. This means they don’t always recommend the most appropriate products for their clients.
- Not providing adequate information about the equity release mortgage
- Pressurising clients into choosing a specific product
- Not finding out information about the client’s financial circumstances and what they hope to achieve for the future
- Not presenting the client with a full range of options
Is an equity release mortgage a viable option?
Any form of financial product carries an element of risk. It’s important to understand this before committing to an equity release mortgage – and to ensure that you’ve got all the information you need to make an informed decision.
Rising numbers of customers are making formal complaints about their equity release mortgages, particularly with regards to the manner in which they were sold. It’s advisable to keep the pitfalls in mind, to make sure you avoid issues in the future.