Equity release used to have a bad reputation, but that was at a time when there were very few options available.
However, the equity release sector has grown and developed over the last few years and there is now a much larger variety of different products on the market. With this has come more competitive interest rates, greater flexibility, and better terms.
This guides debunks some of the most commonly thought equity release myths!
Myth 1: ‘I won’t own my home anymore’
At one point in time, home reversion plans were the only equity release product on the market. These plans involved transferring part or full ownership of the property to the lender, depending on the percentage of the property value borrowed. This is why equity release gained this reputation.
However, the equity release sector has gone through many changes in recent years and now the majority of the market is based on the lifetime mortgage model instead.
A lifetime mortgage works in a similar way to a traditional mortgage in that it is simply secured against the property and ownership of the property stays 100% with you. Even if you borrowed an amount equal to 100% of the property’s value, you would still retain full ownership.
Myth 2: ‘I will end up owing more than my property is worth’
When you take out a lifetime mortgage you must make sure that the equity release broker and/or lender is a member of the Equity Release Council.
This is because all members of the Equity Release Council must provide a ‘no negative equity guarantee’ on all of their equity release plans.
The ‘no negative equity guarantee’ means that you will never owe more than your property is worth, even in the unlikely event that the value of your property decreases and the sale of the property is not enough to clear the loan at the end of the term. Any outstanding debt that can’t be cleared through the sale of the property will be written off by the lender so neither you, or your beneficiaries, will be held liable to repay it.
Myth 3: ‘I won’t be able to leave an inheritance’
For some people, leaving a ‘legacy’ is very important and not being able to leave anything behind can be a worry to some customers.
However, taking out a lifetime mortgage doesn’t necessarily mean that you won’t be able to leave your beneficiaries an inheritance.
First of all, a common use for equity release is to give your beneficiaries their inheritance early. This may be at a time when it’s more beneficial for them, for example, to purchase their first home. This can also be a useful inheritance tax planning tool.
Secondly, a lot of equity release plans come with a ‘guaranteed inheritance feature’. This means that you will never owe more than the percentage of the property’s value that you borrowed. For example; your property was worth £200,000 when you took out the lifetime mortgage and you borrowed £100,000 (50%). Even with the interest added, you will never owe more than 50% of the value of the property even if the value substantially increases.
Myth 4: ‘I won’t be able to move house’
As a lifetime mortgage is a long term financial product, many people believe that once you take out the facility you won’t be able to move house.
However, lifetime mortgages are transferrable on a lot of plans but not all, so you need to discuss this with your advisor if you think this is likely something that you’ll want to do.
The property will also need to meet the lender’s criteria and another valuation may need to be carried out, so you just need to bear these things in mind.
Myth 5: ‘I will have to make monthly repayments’
With a lifetime mortgage you do not have to make any monthly repayments.
The interest is rolled up and added to the loan facility which is repaid at the end of the term. This is usually when your property is sold after you pass away or move to a permanent care facility.
There are interest only lifetime mortgages available if you have the means to make monthly repayments and want to reduce the impact of rolled up interest.
