Equity Release Myths
Despite its potential benefits, equity release is often surrounded by misconceptions that make it seem daunting. Here, we clarify some of the little known truths about equity release to provide a clearer understanding of how equity release works.
Myth 1
Equity release will leave nothing for my children to inherit and could put them in debt
Equity release allows you to borrow money against the value of your home (a lifetime mortgage) or sell a portion of your home to a provider (a home reversion plan).
With a lifetime mortgage, the loan and accumulated interest are typically repaid when you (or the last surviving owner in a joint agreement) pass away or move into long-term care.
Fact
While equity release will reduce the inheritance you leave to your children, it does not mean you or your heirs will owe money to the provider.
Providers members of the Equity Release Council and regulated by the Financial Conduct Authority offer a ‘no negative equity guarantee.’
This ensures that the repayment amount will not exceed the property’s value at the time of sale, protecting your family from debt beyond the home’s worth.
This means you can consider your children’s future while benefiting from the value of your property.
Myth 2
The lifetime mortgage provider will own my house
Many people mistakenly believe that equity release equates to selling their home while retaining the right to live there.
However, a lifetime mortgage is akin to a traditional mortgage, where the loan is secured against your property.
Fact
You retain ownership of your home with a lifetime mortgage. The provider only holds a claim against it for the repayment of the loan and accumulated interest, typically settled upon death or entry into long-term care.
This means you have the freedom to decide how to repay the mortgage, whether from the sale of the home or other assets.
Myth 3
We’ll lose our home if one of us needs to go into care
If one of you needs to move into a care home, you won’t automatically lose your home. With an equity release plan, you have the option to keep your home and repay the mortgage from other assets, if you choose not to sell the home.
Fact
If you have a joint equity release plan, it remains active as long as one owner continues to live in the home.
The plan only ends when both partners have either passed away or moved into permanent long-term care; at this point, the house may be sold to repay the loan.
If only one partner requires care, the other can stay in the home, and the equity release plan will continue.
Myth 4
Equity release only provides a one-off lump sum
A common misconception is that equity release only offers a single lump-sum payment.
Fact
Equity release can be more flexible. Many people opt for a drawdown lifetime mortgage, allowing them to take smaller sums regularly.
This method can help supplement pension income over time and may result in slower interest accrual than a lump sum, as interest is only charged once it is withdrawn.
Additional Insights on Equity Release
Multiple Types of Equity Release Plans
There are various equity release plans, each with its features. The most common is the lifetime mortgage, which includes options like lump sum and drawdown plans.
Other types include home reversion plans and retirement interest-only mortgages.
Using Equity Release to Purchase a New Home
Equity release can also be used to help finance the purchase of a new home. This can be particularly useful if you find a property that exceeds your initial budget.
Additionally, lifetime mortgages are portable, allowing you to move and transfer your existing plan or repay it from the sale proceeds of your current home.
Making Penalty-Free Repayments
New lifetime mortgages that meet Equity Release Council standards allow for voluntary penalty-free repayments, often up to 10% of the borrowed amount per year.
Some plans offer even higher repayment limits.
Making regular repayments can also secure discounted interest rates, helping to manage the overall cost of the loan.
Things you need to know about Equity Release
Equity release can offer a way to access extra funds without leaving your home, but it’s not without drawbacks. Here are some reasons why it might not be the best choice for everyone.
- Cost. Equity release can be more expensive than a regular mortgage. With a lifetime mortgage, you’ll typically face higher interest rates, and the interest can compound over time, increasing your debt.
- No fixed term. Lifetime mortgages usually don’t have a fixed repayment term. The interest rate remains constant throughout the contract, and any additional borrowing may have varying interest rates, potentially affecting your overall debt.
- Home valuation. Home reversion plans may not offer the total market value of your property since you’re allowed to remain in your home for life. This means you might receive less than if you sell your property on the open market.
- Future financial needs. Releasing equity from your home could limit your ability to use the property’s value for future financial needs, such as long-term care expenses.
- Downsizing challenges. While you can move home and transfer your lifetime mortgage, downsizing may not be feasible if you don’t have enough equity to cover the mortgage repayment.
- Impact on benefits. Receiving money from equity release could affect your eligibility for state benefits, potentially reducing your overall income.
- Arrangement fees. Equity release often involves arrangement fees ranging from £1,500 to £3,000 depending on the plan, adding to the overall cost.
- Inheritance. If you opt for an interest roll-up lifetime mortgage, there may be less to pass on to your family as inheritance, as the debt accumulates over time.
- Complexity. Equity release schemes can be intricate to unwind if you change your mind, requiring careful consideration and professional advice.
- Early repayment charges. Changing your mind about equity release may incur early repayment charges, although these are typically waived in the event of death or moving into long-term care.
- Impact on inheritance. Equity release can impact the inheritance you leave to your family members, potentially leading to conflicts or complications. Open communication with your family is crucial to address any concerns or expectations.
Considering these factors alongside your circumstances and financial goals is essential when evaluating whether equity release is the right option for you.
Remember, there are alternatives to equity release.
Looking for a quote?
While we do not provide a quote or call-back service as our website is purely informational, we understand that some people do want an equity release quote.
Get Started
To find out how to get the best equity release quote read our guide
