Equity release allows homeowners over the age of 55 to release tax-free cash from the value of their home. There are two equity release options – Lifetime mortgages and Home Reversion schemes. Home Reversion schemes require a sale of some or all of you property, and no interest is charged.
While it is fair to say that the current appetite for Home Reversion is very low, today’s Lifetime mortgages are increasingly flexible, transparent, and heavily regulated. Both Lifetime mortgages and Home Reversion schemes are long-term borrowing options. They are usually repaid from the sale of your home once the last borrower passes away or enters permanent long-term care.
Unfortunately, there are a lot of misconceptions about equity release from previous products that were not fit for purpose and which led to a number of poor customer outcomes.
In this article, we will attempt to address and debunk many of the equity release myths that still remain today.
Facts vs. fiction
Below, we have taken a look at some of the most common equity release myths and separated the fact from the fiction.
Myth #1: Equity release requires monthly repayments
Contrary to popular belief, you aren’t committed to making monthly repayments when you release equity. The Lifetime mortgage, unpaid interest, and any fees are repaid only after the last borrower has passed away or entered long-term care. However, making voluntary payments will help to protect the remaining equity for your beneficiaries.
Myth #2: I am concerned about negative equity for my family
All Equity Release Council-approved plans include a no-negative equity guarantee. As such, you will never have to repay more than your home is worth, so you will not pass on a debt to your estate.
Myth #3: Only able to receive lump sums
Many equity release Lifetime mortgages allow you to enjoy a drawdown facility, giving you the freedom to receive an initial lump sum and choose how much and when to access additional funds.
Drawdown facilities help avoid incurring interest on funds you may not be using, unlike releasing a lump sum with other types of mortgage and being charged for funds that you place on deposit.
Myth #4: Loss of ownership
Your home still belongs to you if you release equity with a Lifetime mortgage. Once the mortgage has been taken out, the lender simply places a charge on the title of the property — this is exactly the same as a standard mortgage.
Contrary to popular belief, the only time you relinquish ownership of your home by releasing equity is if you take out a Home Reversion scheme.
Myth #5: Can’t move house
It is an Equity Release Council product standard that Lifetime mortgages are portable, and borrowers can take their loan with them to a new property, subject to the lender’s prevailing property criteria.
At Henry Dannell, we only recommend Equity Release Council-approved Lifetime mortgages, so you can rest assured that you could port your loan if you were to release equity and then decide to move home.
Myth #6: Lender handles the sale of the property
Unfortunately, this is a widespread equity release myth. However, we can reveal that the sale of your property is handled exclusively by you or your appointed executor(s).
Please note, however, that the lender may check that the property is being marketed with one or a number of agents and at a fair market price. The mortgage will incur interest until it is repaid, so it is not in anyone’s interest for the property to remain unsold.
Myth #7: We already have a mortgage; can we get another?
Simply put, yes. A Lifetime mortgage is based on the youngest homeowner’s age and property value; their income is not relevant.
However, because a Lifetime mortgage charge is the first and only one allowed, any existing mortgage would usually be repaid from the Lifetime mortgage funds, with any other required funds borrowed in addition, increasing the required loan.
Myth #8: Equity release is an expensive way to borrow
While it is true that Lifetime mortgage interest rates are higher than on standard mortgages, it should be noted that funds are released at a fixed rate for life and could mean borrowing for many years. You repay the loan when you no longer require the funds or have vacated your home.
As you retain full ownership of your property with a Lifetime mortgage, it’s possible that you or your estate could benefit from an increase in property value, although future property values are not guaranteed and they could also fall.
Equity Release Council-approved Lifetime mortgages allow flexible, voluntary payments up to annual plan-specific penalty-free limits, so the full interest and even some of the capital could be paid if it is affordable. Making voluntary payments helps protect the remaining home equity from the effect of compounding on any unpaid interest.
Myth #9: Equity release is unsafe
Equity release, both Lifetime mortgages and Home Reversion schemes, are regulated by the Financial Conduct Authority (FCA). In addition to the FCA regulations, the Equity Release Council works tirelessly to promote safe equity release from Lifetime mortgages, focusing on high standards of advice for members and specific product features included in approved plans.
In conjunction with receiving advice from a qualified adviser, borrowers must also receive independent legal advice prior to receiving their funds. This additional, mandatory step provides yet another layer of protection for borrowers.
Myth #10: My partner will have to leave the property
As long as you and your partner are named borrowers on a joint Lifetime mortgage, your partner can stay in the property for life, even if you pass away or move into permanent care.
Benefits of Later Life mortgages
Both Lifetime mortgages and Retirement Interest Only mortgages (RIOs) can offer a great way of realising your dreams and helping you to achieve goals in your later years by accessing the value built up in your home.
An often overlooked benefit is that a RIO or Lifetime mortgage can be used to complete the purchase of a new home. Many potential borrowers assume they are only available on current homes.
By choosing a Later Life mortgage with Henry Dannell, you pay a straightforward advice fee of £1,295 on completion of your mortgage. The advice fee is a “fee for life,” meaning that if circumstances change and you have exhausted your available funds, our Later Life advice will be available to you again at any time, with no additional advice fee payable should you wish to release additional funds or remortgage.
At Henry Dannell, we advise on a wide range of mortgage products, so it’s worth speaking with one of our specialists to explore your options and learn more.
Please note: Later Life product options include Retirement Interest Only, Lifetime mortgages, and Home Reversion schemes. To understand the features and risks, always obtain a personalised illustration.