Do you have questions about how equity release works? You’re not alone. Confusion around equity release prevents many people from considering this popular form of financing.
A common type of equity release in the UK is a lifetime mortgage, which allows a homeowner to access a portion of their home’s value as a one-off tax-free payment. This amount, as well as the interest accumulated, only needs to be repaid when you move into long-term care, pass away, or sell your home.
Here we unpack five common myths around equity release and explain how equity release can improve your finances.
Myth 1: Your Family Could Owe MORE Than Your Property IS WORTH
If you select an equity release plan from a provider approved by the Equity Release Council1; you’ll never owe more than the worth of your house after its sale. This assurance is called a no-negative-equity guarantee.
What does this mean for you?
The no-negative-equity guarantee means that if your home sells for less than the mortgage value; the difference will be written off. Usually, any funds left over after the mortgage has been settled will be paid to the beneficiaries in your will.
Myth 2: You Will Have to Pay Monthly Instalments
A lifetime mortgage2 does not come with monthly payments unless you chose this specific type of plan. Some plans allow for optional payments of 10% or less of the mortgage balance annually, penalty-free.
You might be asking yourself:
What if I choose to structure my repayments differently? With this option, interest on the borrowed amount may add up over the years. This interest will have to be paid upon your death or when you move into permanent long-term care. If your equity release product was taken as a couple, it would carry on until the last person no longer lives in your home.
Myth 3: You Will No Longer Own Your Property
An equity release product is not the same as selling your home. Instead, you’re borrowing against your home. This means that you’ll maintain ownership of your property.
You, like many people, could be unsure how a lifetime mortgage differs from a conventional mortgage.
In simple terms:
A lifetime mortgage is, in essence, a long-term loan, which you repay with your property. A key difference is that it has no fixed end date.
What this means is that the mortgage will last for the length of time you require it. A lifetime mortgage has the added benefit of being well suited to older homeowners, as many product options are specifically designed for those in their 60s.
Myth 4: A Mortgage Prevents You from Releasing Equity on Your House
If you have a mortgage on your house, you’ll still be able to release equity from your home. An often-cited reason for taking out a lifetime mortgage is to leverage the value of your home to repay an existing mortgage.
What does this mean for you?
A lifetime mortgage allows the customer to receive cash in return and for the equivalent of the first charge on their home. This cash can be used, in the same legal transaction, to repay an existing mortgage. The lifetime mortgage also gives them the benefit of a life term with no concerns over repayment.
Those who want to make repayments regularly or monthly can choose a plan that suits them, and this can be deducted via direct debit order. Should the customer be unable to pay, or miss three instalments, the mortgage will automatically switch to rolled-up interest instead of defaulting.
Myth 5: Equity Release Will Affect Your Family’s Inheritance
In the last few years, lifetime mortgages have become more flexible, with numerous products and plans available. Some options will let you keep a portion of your equity aside to leave to your family as an inheritance.
And the good news?
If you would prefer, your beneficiaries could receive financial support before your death as equity release can be used to provide them with an early bequest. However, this option will leave you with less equity for you to use later and may decrease your estate’s value.
Did you know?
Financial gifts and loans are usually given to the younger generation – between 25 and 44 years old – according to data from the Office for National Statistics. In the last two years, around 10% of those in the age group gifted or loaned over £500.
The older generation often wants what they had in their youth for their children and grandchildren, and this could explain the increase in equity release over the last year. In the third quarter of last year, homeowners released around £11m daily from their properties. A large proportion of this will likely go to assist younger family members in purchasing property or funding schooling and living expenses.
A Few Common Questions
One shortcoming of equity release is that you will not be paid the full market value of your property. Should you sell your home, you would receive more cash. However, you would still need to relocate, which has added expenses.
These financial products are governed by the Equity Release Council and are regulated. Should you choose a lifetime mortgage, you will remain the owner of your home. You will also have a no negative equity guarantee.
Most equity release plans make allowance for you to move the mortgage to a new property should you decide to sell your home. This option may be depended on the leader approving the new house, and you may need to make an early repayment.
Equity release is usually suggested to consumers over 60 because there is an age limit. The minimum age for equity release is generally between 55 and 60.
Equity release allows you to use the value in your home to borrow funds and is a popular option among the elderly. Products such a lifetime mortgage can give you funds without many of the disadvantages of a conventional loan and offer the guarantee that you’ll never owe more than the value of your home. This form of borrowing has proven a safe and popular way to allow homeowners to access financing.