Equity release has grown in popularity in recent years, with a rising number of products available – and rates are becoming increasingly competitive too. However, there are still a lot of myths surrounding the sector, largely a hangover from poorer-quality products in previous decades that left people out of pocket. These days, there are strict standards that equity release providers have to maintain, so we thought we’d run through some of the myths about equity release so we could well and truly bust them.
The first myth is a big one – and it’s one that we’re happy to say is false! Years ago, this was a common complaint, as the lower standards in the sector meant that some customers could end up owing significantly more than their home’s value. These days that’s no longer an issue – as long as your provider is a member of the Equity Release Council, and all of the big providers are, it has to offer a no negative equity guarantee, which means you’ll never owe more than your home is worth. This is the case no matter how much interest rolls up, not even if house prices fall significantly and mean the sale of the property doesn’t cover the amount owed – in this event, the remaining sum would be written off.
This isn’t necessarily the case. Many plans give you the option of ring-fencing a certain proportion of your property’s value to leave behind as an inheritance – though this will effectively reduce the amount you’ll be able to borrow – so it simply depends how much equity you want to release. This is when a frank and honest discussion with your future beneficiaries comes in, so you can strike the right balance between releasing enough money to suit your current requirements while keeping their future needs in mind as well.
However, even if you don’t ringfence a proportion of your property’s value, there could still be some left from the sale to leave as an inheritance – once the house is sold and the loan and any interest is repaid, anything left forms part of your estate.
Actually, this isn’t set in stone, and there’s the possibility that your beneficiaries may choose to repay the loan another way. Most do this by selling the property, but they by no means have to – if they’ve got other funds available, either personally or through any additional monies from your estate, they could theoretically pay back the loan via other means and keep the family home. An important point to note is that the plan must be repaid within a specific period of time, usually 12 months from death.
Not true – in fact, taking out an equity release plan is a legitimate way to pay off a current mortgage and ensure you don’t have to keep making repayments in retirement. Speak to a broker to see if this could be an option for you.
False. Much like with a traditional mortgage, you’ll be able to move and take your equity release agreement with you – provided the new property meets the eligibility criteria of your provider. If it does, it should simply be a case of transferring the plan to your new home, though you must check whether this will be an option with your provider before you take the plunge.
Typically speaking, if you’re living with a partner, you’ll probably be taking out a joint lifetime mortgage. If this is the case, there’ll be no need for you to move out of the property if your partner dies or goes into long-term care – the plan will run for as long as you remain in the property. However, if a partner moves in with you after you have already taken out a lifetime mortgage, they may have to move out when one of these events happens.
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There’s a common misconception that all equity release plans mean the provider owns your home, with you merely being granted the right to continue living there. This is false – equity release in the form of a lifetime mortgage is simply a method of borrowing against your property, much like any other mortgage, with the difference being that you don’t have to make any repayments in your lifetime (unless you want to). There is a second, less common, method of equity release called home reversion, where you do sell all or part of your home to the provider.
With a lifetime mortgage you’ll continue to own your home, and as such can make any modifications you deem fit. Even when it’s time to repay the loan, the equity release provider won’t have any claim to the house itself – they’ll simply need to be repaid the amount they’re owed, usually through sale of the property, but as discussed above, if other money is available (e.g. if there’s sufficient money left in the estate) your home may not even have to be sold.
This isn’t necessarily the case. Traditional lifetime mortgages don’t require you to make any repayments at all – the interest is rolled up and will be repaid along with the initial capital when the property is sold. The exception to this is if you specifically choose to keep making repayments, but if you find that you can’t keep up with them, you can usually switch to a rolled-up plan at a later date. Even if you miss repayments, the mortgage doesn’t default – it will switch to rolled-up interest instead.
Not so. While it’s true that a lot of people choose a lump sum equity release plan – which, as the name suggests, means you get the full loan amount in one go – it isn’t the only option. Drawdown is becoming increasingly popular, with this plan type allowing you to “draw down” sums of money from your home as and when you need it. The advantage of this is that interest is only charged on the amount you’ve actually withdrawn, and as you’re taking smaller sums over a longer period of time, the resulting interest payment will be lower. This method could also be a viable way to supplement your pension income, letting you drip-feed smaller sums into your finances rather than taking the full amount of equity available to you at the outset.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.