On paper, it’s easy to see why equity release mortgages are appealing. They enable you to free up cash from your property, enjoy a more comfortable retirement; and all without having to move out of your home.

However, the Financial Ombudsman Service has received several complaints from unhappy customers, and this has highlighted the riskier aspects of this type of mortgage product. Here’s more information.

Equity release mortgages – the benefits

When equity release mortgages are right for the consumer, they offer significant advantages. It’s a chance to release funds that are tied up in your property, and use them to support your retirement. This is beneficial if your pension pot doesn’t provide you with a satisfactory income; especially as there are protections in place to ensure that you don’t have to move out of your house (unless you go into a care home).

What are the risks?

While these mortgage products are right for some, they’re not suitable for everybody. These are just a few of the issues associated with releasing equity from your home:

• Interest rates (and increasing debt). Some borrowers aren’t aware of how much they’ll need to pay back at the end of the mortgage term. With interest rates being as high as 5%, it can be a significant sum of money. For example, if you borrowed £20,000 on your £120,000 house when you were sixty (with an interest rate of roughly 5%), you’d need to pay back £80,000 by the time you were 88.
• Reduced market value. Another common complaint is that equity release doesn’t pay out the full market value of your property. You’ll actually get less money than you would if you chose to sell your home instead.
• Less inheritance for loved ones. Equity release mortgages eat into the value of your property, which means your relations will get a reduced inheritance after your death.
• There are often early repayment charges. There’s usually the option to end your equity release mortgage before the term is up, but this often incurs a hefty fee. It’s vital to find out what the early repayment charges are before you commit to anything.
• Some advisors sell ‘the dream’. In the past, mortgage providers have come under fire for the way in which they sell equity release products. If they encourage you to take the mortgage so you can enjoy a holiday of a lifetime, or treat the family to something special, this is regarded as mis-selling. An equity release mortgage should be used to provide necessary cash in your retirement, not to purchase luxuries.
• It affects benefits. By having access to a sum of money, you may find that you’re no longer eligible to receive certain means-tested benefits. These include Income Support, Pension Credit, Universal Credit, Jobseeker’s Allowance, Employment and Support Allowance, or Council Tax Support.

Reducing risks

It’s always important to review your options before committing to any financial product, and to understand exactly what you’re agreeing to. A financial advisor has a responsibility to explain the equity release mortgage properly, and to recommend a range of options that are suited to your needs. If they fail to do this, it’s regarded as mis-selling, and you may be entitled to make a claim against them.

References

https://www.unbiased.co.uk/life/homes-property/is-equity-release-safe-the-pros-and-cons
https://www.moneysavingexpert.com/mortgages/equity-release/