are controversial loans a financial savior or a debt trap?

Turning your own home into an ATM without having to sell it can be a real boon for older homeowners – but freeing up capital can also be a “costly mistake” when used for the wrong reasons.

Freeing up cash can provide a lifeline for those who need to pay off existing mortgages that have come due or help family members who are trying to move up the housing ladder themselves.

Others choose it to improve their housing, pay for vacations or simply generate additional income to better enjoy their retirement.

But it can be costly in the long run, and many homeowners who have taken out capital release plans have lived to regret it. Should we take the leap? Telegraph Money spoke to two Equity Release users to find out what went right – and what went wrong.

‘Equity release saved my £1.1m home’

Robert Bicknell, 64, a singing teacher, said the stock release was key to saving his beloved £1.1million home in Brixton.

Mr Bicknell has worked from home all his life, using his large music room for the past 25 years, but feared he would have to sell when his £280,000 interest-only mortgage ended in September 2021.

“I have searched for three years trying to buy elsewhere but it is very difficult to find anything suitable to work in London’s travel zone 2. A new music room would cost me £50,000 to install “, did he declare. The private singing teacher has coached West End stars, rock bands and RnB big names.

He said: “I’m in my prime, I can still work and it was very important for me to stay here. I decided it was a good time to take out a lifetime mortgage when interest rates were low.

Mr Bicknell secured an equity release deal with an interest rate of 4.09% through provider Legal and General. He said he was told he could move out and defer the life mortgage if he decided to move in the future.

“I have no regrets, it was great. Why move and get new neighbors and change places of work when I can stay,” he said.

Claire Singleton of Legal and General said she expects using your home to fund retirement, in particular, will become more common.

The ideal candidate for equity release is someone over the age of 55 who has a definite need to borrow that cannot be met any other way, says equity release specialist Andy Wilson. at Andy Wilson Financial Services, a solidifier advisor.

“They will only take what is likely to be spent or used quickly, and may have a drawdown reserve for any additional borrowing needs that may arise. If they have sufficient income, they will be better advised to consider paying the interest charged to get the debt under control,” he added.

“The release of shares was a terrible mistake”

Lifetime mortgages may be the solution for some, but others have found themselves trapped under the weight of spiraling debt.

Craig Bannister*, 88, from Stockport, who is terminally ill, said he deeply regrets taking an equity release and it has become a ‘painful burden’ on him and his wife, who is suffering of dementia.

The octogenarian freed up £50,000 from his £350,000 home 20 years ago to fund home renovations and a cruise in retirement, intending to repay the loan on the move a few years later. However, the move never materialized and the amount owed has since soared to £260,000, thanks to a compound interest rate of 6.69pc.

“None of us can contemplate moving in our current fragile state of health. In the unlikely event that I live much longer, the remaining capital will be zero,” he said.

“There should be safeguards in place to cap these loans when they reach wildly unrealistic levels – or at least the ability to re-mortgage at a lower rate.”

The way interest is calculated on capital release loans means that debts accumulate much faster than on a traditional mortgage. Higher interest rates can have a devastating impact, as the owner’s stake in the property is reduced more quickly.

Lifetime mortgages arranged years ago were expensive, unregulated and caused regret for many borrowers, but today’s plans have far more protections in place, Wilson said.

The solution to increasing debt is to pay off some or all of the monthly interest charged, depending on the advisor. This prevents the debt from increasing, or at least allows it to increase more slowly, thereby preserving more of the property’s value.

However, repaying all the equity released can lead to huge penalties, as it is designed as a “lifetime loan”.

Older owners who want to access money from their property to give an early inheritance to family members can use capital release, but the long-term cost of doing so will be higher, Wilson warned.

“Releasing large sums as part of an estate tax mitigation exercise can be flawed, with compound interest potentially exceeding potential tax liability,” he said.

Life mortgages can also create problems in cases where one person in a couple is the sole owner of the property. In this situation, if the owner dies, the non-borrowing partner will not have the right to stay in the accommodation.

*Name has been changed

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