Is equity release really so bad?

sortofwinning

Hello, I'm not retiring for another 25 years so I'm jumping the gun a bit here, but I like to plan well in advance.


I like the idea of equity release once I get to retirement age, but I keep reading about the perils of it. These perils seem to apply to people who have kids. I've read a few articles on MSE about it and I can't see anything wrong from my own point of view. I don't have any kids and have no intention of having any. So if I die in debt due to a high interest rate from the financial institution involved in the equity release, nobody is going to have to pay the debt, they just won't get any money from my estate. My niece and nephew will be my beneficiaries but my brother is very well off and they will be well taken care of without any input from me, whereas I'm the one in a low paid job trying to do everything I can do maximise my retirement income.


Is there anything else bad about equity release that I don't know about? I've read a Dummies book on personal finance which again said there were perils but wasn't too specific, so now I'm wondering why it's supposedly so bad. But the only problem I can see with it is leaving your kids no money, which isn't a problem for me.

Freecall

I don't think that in itself there is anything particularly bad about equity release. In many circumstances (possibly including those you describe) I could see that it would make a lot of sense. In fact, it could even be argued that it is a good thing from a wider economic perspective.

The same could be said about other high-value transactions of this kind. A good example would be timeshare where an asset which you perhaps only use for a couple of weeks a year is shared with others who have the same needs thus sharing the overal capital and on-going fixed costs.

The problem is with both equity release and timeshare is that these schemes, while sensible in themselves, have been hijacked by sales driven organisations and individuals who load huge costs onto the basic product.

In the UK the regulators have attempted to crack down on the worst excesses of the equity release industry so things are better than they were a few years ago but I would still be very careful in this area. It is after all still a relatively embryonic industry.

zagfles

As well as scams and high charges, unless you understand the maths of equity release you're unlikely to get as much as you think.

PlutoinCapricorn

I am very interested in this subject myself. It is not covered officially by MSE for much the same reasons as they do not recommend payday loans.

I vaguely remember hearing something about a possible government equity release scheme.

dunstonh

These perils seem to apply to people who have kids.

usually as the parent doesnt let the children know. When they children think they are going to get a nice inheritance, they get angry when they find out they are not.

Equity release is highly regulated. You need to take legal advice and the there is a code that sets specific term limits. So, as long as you stick to mainstream that belong to that, it is fine. Just like any product you buy, the more you understand, the less likely there are to be issues.

atush

Personally, as I have kids, I prefer the downsizing route.

But I can see that for those who dont, it is a legitimate option. Pkus I think this area is better regulated/more competitive than past decades.

margaretclare

In 25 years' time, a whole lot of things may have changed.

We did equity release in 2003 to pay off an existing mortgage. We saw no sense in going on paying a mortgage until we were 83, just in time to die and leave it all to someone else. My younger daughter's unexpected death was a big factor in our thinking.

We were lucky in that our lifetime mortgage was pegged to the Bank Rate which has stayed historically low for a very long time.

Everyone's circumstances will be different.

kidmugsy

It depends partly on how interest rates change. If, say, you fix your equity release mortgage at 6% p.a., and then rates rise to, say, 10% p.a., you'll feel you've done pretty well out of it. A lot of the people who complain about it borrowed at a high rate and then saw rates fall. Others complain that their house's value increased more than they expected and that the benefit goes to the mortgage company.

Tough luck! Those are the gambles they chose to take.

I'm a bit of a sceptic about downsizing. Many people would like a spare bedroom for when the children visit, and another for the grandchildren. To release a useful sum many would need to move to some distance from friends. Anyway, OP, with no children you presumably will own a property of modest size anyway.

dunstonh

I'm a bit of a sceptic about downsizing.

Me too. In my experience people that think that they will downsize tend to not realise as much as they think. Either because they dont have scope to downsize as much as needed (i.e 3 bed to 2 bed) or that when they start looking at what downsizing actually means (small rooms etc) they dont want to do that. Also, they often forget the costs, such as estate agents and stamp duty etc as well as often the need to redecorate.

it can work but if you are already in a 2/3 bed semi, then you may find it wont.

atush

kidmugsy wrote: »

It depends partly on how interest rates change. If, say, you fix your equity release mortgage at 6% p.a., and then rates rise to, say, 10% p.a., you'll feel you've done pretty well out of it. A lot of the people who complain about it borrowed at a high rate and then saw rates fall. Others complain that their house's value increased more than they expected and that the benefit goes to the mortgage company.

Tough luck! Those are the gambles they chose to take.

I'm a bit of a sceptic about downsizing. Many people would like a spare bedroom for when the children visit, and another for the grandchildren. To release a useful sum many would need to move to some distance from friends. Anyway, OP, with no children you presumably will own a property of modest size anyway.

I have 5 bedrooms but will downsize to 3. I am not expecting all 3 of them to come back at any one time, but if they do they can share lol

kidmugsy

atush wrote: »

I have 5 bedrooms but will downsize to 3. I am not expecting all 3 of them to come back at any one time, but if they do they can share lol

Tell 'em to come in the summer so that they can share tents.


A widowed friend sets great store by having a large family gathering at Xmas, so she's kept a house that's otherwise far too large, offset partly by always having a lodger. I have the impression that one of her boys thinks it's getting too much for her, and plans to offer his (huge) house for the gathering. Maybe she'll rethink then. I hope she keeps a room for a lodger: it's company as well as an income.