Equity Release Myth Busting

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Equity Release Myth Busting
Chris Needham busts some common myths surrounding equity release.

What is equity release? 

It’s a way that older borrowers aged 55 and over can release some of the value of their home as cash – without needing to sell their property. This can either be one lump sum or alternatively, smaller lump sums with a further cash reserve to draw from in the future. 

It’s a way of taking advantage of the equity in your property and releasing some of that as cash.

Myth 1: Equity release isn’t safe

It’s fair to say it probably wasn’t in the past. But equity relief today is safe – although it is certainly an area of specialist advice. You need to discuss the options with a specialist mortgage advisor with the appropriate qualifications.

You also need to take independent legal advice. There are many different aspects to consider if you’re looking at equity release, so always speak to a qualified advisor right at the start of the process. 

Equity release products are all regulated by the Financial Conduct Authority and governed by the Equity Release Council, so it is now a very safe product.

Myth 2: It’s also called a lifetime mortgage – so I have to stay in my property for the rest of my life 

A lifetime mortgage is a type of mortgage secured to your property that does not require you to make any payments. The interest is rolled up and added to the loan, so the amount that you owe increases over time. 

When you take out a lifetime mortgage you retain ownership of the property and the initial loan. The rolled up interest is only repaid when you die or move into long-term care. Having said that, some schemes do allow you to make interest payments each month so that the debt remains the same as the initial loan you took out. 

You’re able to remain in your property. But if you wanted to move home that’s possible subject to the amount you owe and the value and suitability of the new property. 

Myth 3: you can end up owing more than your house is worth, leaving family with that debt 

This is a really important one. Products that meet the equity release council standards come with a no negative equity guarantee. It means that your estate, i.e. your family, cannot be left with a debt larger than the value of the property. 

The lender will assess the property at the start of the application and will work out the maximum loan based on your age and the value of the property. The debt can’t roll up to be worth more than the value of the property.

If that did happen, the lender would lose the money, not your estate. As the interest rolls up, lenders take this into account. That’s why they would lend a lot more to an 85 year old than to a 55 year old on the same property. 

Myth 4: equity release rates are really expensive 

Like all borrowing, rates have increased quite a bit over the last 12 months due to pressures on the financial economy. Equity release is a specialist product. So it is really important to understand whether it’s the most suitable solution for your needs at the time. 

There are a number of other things that we would consider for a borrower before proceeding with equity release. But while rates are changing all the time, there are great products out there and it can be quite a cost effective solution. 

Myth 5: I’ll lose control and ownership over my home.

No, that’s definitely incorrect. With a lifetime mortgage you remain in your home until you die or move into long-term care. You retain ownership of the property until then.

Myth 6: I haven’t completely paid off my existing mortgage so I can’t look at equity release.

Again, that’s definitely not true. We do arrange equity release solutions for clients that have already got an existing mortgage debt. Where it’s the right solution, the equity release loan would repay the existing mortgage. We’ve done a lot of these recently where a client’s interest-only mortgage is due to be repaid because they’re coming to the end of the term. 

Rather than have to sell the property, an equity release mortgage can replace that standard mortgage. Equity release does need careful consideration against other options before you go down that avenue.

What are the common uses of equity release?

We’ve had a mixture of uses over the last 24 months or so. As I’ve just said, sometimes a client takes out equity release to repay a traditional mortgage, so that they don’t have to sell the property. 

We’ve done it for a number of other reasons – sometimes people want to raise money to do house repairs. We had someone with a leaky roof and no other way of funding a new one.

Or it might be other home improvements or adaptations to make the property more suitable. 

We have also done a few where people want to gift money to family members – a house deposit for a son or daughter, for example. Or it can pay for weddings. We’ve had a couple of enquiries from people who just want to enjoy the later stages of their life. They are asset rich with a house, but cash poor, so they look at equity release to have expensive holidays or new cars.

What criteria is looked at for equity release?

The value and suitability of the property is an important factor to the lenders, and they’re also interested in the age and the health of the applicant. Because the interest rolls up lenders are more wary of a 55 year old taking out equity release because they are likely to live for longer – so that debt can roll up higher. Someone aged 85 is unlikely to live for another thirty years. 

The key factors are the value of the property, any existing debts on it and the age and health of the applicants.

What about beneficiaries concerned about their inheritance?

It’s important to take independent legal advice and also to involve your family in any decisions you might be making around equity release.

Securing a debt to the property with an increasing debt means will reduce the equity in your home. That means your family is going to inherit less. So it’s important to involve them in that discussion so they know what’s happening. 

It could be that there are other ways of funding your requirements rather than equity release. Involve the family rather than leave it as a surprise – it could be a shock if they’re expecting to inherit your house with no debt on it.

Importantly, always speak to a specialist advisor and take independent legal advice to make sure this is the right decision for you.

A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action.  If you are considering releasing equity from your home, you should consider all options available before equity release.  

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution.  As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead. This is a referral service.