What Are the Top 12 Myths About Equity Release?
Contributors:
Expert VerifiedKey Takeaways…
- Debunking the equity release myths: it doesn’t cause negative equity, you retain home ownership, and it’s not just a last resort for the desperate—contrary to the common misunderstandings.
- Equity release is a flexible, secure option that is subject to Financial Conduct Authority regulation, so cut through myths by conducting thorough research, comprehending contracts, and seeking professional advice.
- Equity release means tax-free cash without monthly repayments and does not always automatically disqualify you from receiving benefits.
How do you know if the equity release myths you may have heard are true or just scaremongering?
Equity release can be confusing…
As total equity release borrowing doubled between 2017 and 20221, the increasing popularity of these products has given rise to rumours and untruths.
In This Article, You Will Discover:
In this article, the Every Investor team seek to debunk the twelve most common myths about equity release, arming you with accurate and comprehensive information so you will be in a better position to make confident decisions and determine, “How safe is equity release?“.
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Understanding and being aware of equity release risks and warnings is essential for individuals considering this financial option to make informed choices.
Debunking equity release myths seems like a logical place to begin, therefore…
What Is Home Equity Release?
For individuals over 55, equity release presents an opportunity to convert their home equity into cash, maintaining their living situation.
It is an effective approach for financial management in retirement.
The system includes either taking a loan against the home (lifetime mortgage) or selling a part of it (home reversion), with the financial settlement occurring later, usually linked to the property’s sale.
What Are the Most Common Myths About Equity Release?
One common myth about equity release is that it will leave your heirs with a huge debt to repay.
In reality, a no negative equity guarantee protects your estate from owing more than the value of your home. Moreover, many plans allow you to ring-fence a portion of your property’s value to guarantee an inheritance.
Another persistent myth is that equity release equates to losing ownership of your home. With a lifetime mortgage, the most common type of equity release, you retain full ownership.
Meanwhile, a home reversion plan involves selling a part or whole of your property but you can continue to live there rent-free for life.
These popular misconceptions can deter people from leveraging their property wealth in retirement, hence it is crucial to understand the facts.
Myth #1: I Will Owe More Than My Home Is Worth
You will not owe more than your home is worth!
Thankfully, finding yourself in negative equity at the end of your equity release loan is a thing of the past.
As long as you choose a lender that holds Equity Release Council (ERC) membership2, you will be protected by a No Negative Equity Guarantee.
This means you will never owe more than your home sells for at the end of your loan, regardless of the interest accrued.
How does that work?
If your property value decreases or your loan value increases to the point where your outstanding balance cannot be covered by the sale of your home, your provider will be obligated to write off the shortfall.
Myth #2: Equity Release Is Unregulated and Unsafe
Equity release is not unregulated or unsafe, thanks to the ERC and the UK’s Financial Conduct Authority (FCA).
As part of the ERC’s mandate, members must adhere to a strict code of conduct and provide accurate and honest advice that protects consumers.
In addition, all ERC members must…
- Include a No Negative Equity Guarantee in their lifetime mortgage plans.3
- Calculate interest on lifetime mortgages at fixed or capped variable rates.4
- Allow borrowers to make penalty-free repayments up to a certain percentage.5
- Allow clients to move house and take their equity release loan with them (provided the new property meets the provider’s lending criteria).6
- Give borrowers the right to live in their homes for life or until they move into care.7
Myth #3: I Have a Mortgage, so I Can Not Take Out Equity Release
You can take out equity release if you have a mortgage.
In fact, repaying a mortgage is a popular way to use equity release.8
What is the benefit of doing that?
Well, equity release loans do not require you to make any repayments during your lifetime unless you choose to do so.
This means you can use the funds you release to settle your existing mortgage and be free of monthly mortgage payments for the rest of your life.
Myth #4: Equity Release Is Always an Expensive Way to Borrow
Equity release is not always an expensive way to borrow, thanks to new products and a new repayment safeguard introduced by the ERC in March 2022.
Whilst in the past, interest often compounded significantly before repayment, new equity release plans allow penalty-free repayments, reducing principal debt and making the process more affordable.
Is there an alternative?
You could also consider a Retirement Interest-Only (RIO) mortgage.
As the name suggests, these mortgages allow you to pay off the interest during your lifetime, leaving only the principal debt to repay at the end.
Myth #5: I Will Not Be Able to Leave My Loved Ones an Inheritance If I Take Out Equity Release
You will be able to leave your loved ones an inheritance if you take out equity release, as long as you make your advisor aware of your plans.
Many equity release loans now offer inheritance protection, a feature that allows you to set aside a percentage of your property’s value to be passed on to your heirs.
You could, for example, take 50% of the equity to use for yourself and protect the remaining 50% of the property’s future value to pass on to your loved ones.
Is that the only way to pass something on?
No!
Equity release can also be used to pass on a ‘living inheritance’.
Why not release equity from your home and give it to your loved ones while you are still alive, rather than waiting until your passing to leave an inheritance?
Many people choose to do this to help children or grandchildren with things such as a deposit on a first house, university fees, or a first car.10
Myth #6: My Home Will No Longer Belong to Me If I Take Out Equity Release
Your home will still belong to you if you take out an equity release lifetime mortgage.
Retaining 100% ownership of your home is one of the key benefits of opting for a lifetime mortgage.
Take note…
If, however, you choose a home reversion plan, you will cede a percentage of your home to the lender in exchange for a cash sum.
Even so, you will maintain the right to live in your home until you pass away or move into permanent care.
Myth #7: I Will Be Required to Make Monthly Payments
You will not be required to make monthly payments when you take out any form of equity release.
In fact, this is one of the major attractions of this type of loan.
Equity release loan capital and interest are usually repaid only after the borrower passes away or moves to a long-term care facility and the house is sold.
You may, however, decide to make payments during your lifetime to counter the effect of compound interest or to reduce the loan itself.
If you have taken out a new lifetime mortgage that benefits from the ERC’s latest product standard, you will be able to make interest payments or pay off part of your principal debt while incurring no Early Repayment Charges.
Myth #8: I Can Only Take Equity Release as a Lump Sum
You do not need to take equity release as a lump sum anymore.
With competition heating up in the equity release world, modern plans offer much more flexibility than they used to. 11
These days, you are not as limited in how you receive your funds, as you now also have the option of a Drawdown Lifetime Mortgage.
Instead of taking your loan as a once-off lump sum, a drawdown facility allows you the freedom and flexibility to access your loan ‘reserve’ in smaller instalments.
What is the best part?
Interest will only accrue on the money you take from your reserve and not on the total available amount.
Myth #9: I Could Be Evicted From My Home If I Take Out Equity Release
You can not be evicted from your home if you take out equity release.
All plans offered by members of the ERC guarantee you the right to live in your home for the rest of your life.
If you and your partner have taken out a joint plan, this right will stay in place until the last partner passes away or moves into permanent care.
Myth #10: Releasing Money From My Home Is a Last Resort
Releasing money from your home is not necessarily a last resort, but could, in fact, be a valid option for you to consider.
Money borrowed in this way could provide a lifeline in retirement by making your day-to-day living more comfortable or allowing you to make improvements to your home, creating a safer environment.
Myth #11: My Partner Will Have to Move Out If I Pass Away First
Your partner will not need to move out if you pass away first—provided you hold a joint lifetime mortgage.
We touched on this point briefly when discussing Myth #9: A joint equity release plan will stay in place until the last surviving partner passes away or moves into permanent care.
Things may look different if the plan is in your name only, however.
If this is the case, your partner should seek independent legal advice to investigate their options.
If your partner is a beneficiary of your estate and would like to remain in the house, the executor could explore the option of repaying the sum owed using other assets.
Myth #12: Equity Release Is Not a Safe Form of Borrowing
Equity release has become a safer form of borrowing money, thanks to the supervision of the ERC and regulations laid down by the UK’s Financial Conduct Authority (FCA).
Ensure that you only choose a plan from a lender that holds a membership with the ERC in order to benefit from protection such as the No Negative Equity Guarantee.
Read More: Little-Known Truths About Equity Release
Why It Is Important to Seek Independent Specialist Advice
It is very important to seek independent equity release advice to ensure that you are making the best decision based on your circumstances and your financial goals.
While this article has dispelled the most common equity release myths, it has not presented an exhaustive list of facts about this type of product and there may be other aspects when considering an equity release loan.
This article also only serves as a source of information and does not claim to provide advice of any kind.
Main reasons to obtain independent advice are…
- An independent advisor can search the entire market for a suitable plan.
- Your advisor will have knowledge of a wider variety of plans and interest rates.
- Some equity release lenders will only work through an independent specialist.
- An independent advisor will take you through the pros and cons of each plan.
- An independent advisor will offer impartial advice and will let you know if a plan is not right for you.
Consider…
Whilst equity release has many potential benefits, it also carries potential risks.
For example, it may impact your tax position or your entitlement to state benefits.
It could also restrict your ability to move or sell your home in the future.
Always seek professional financial advice before making a decision
Common Questions
What Are the Common Myths About Equity Release in the UK?
How Can I Debunk Popular Equity Release Miseries?
Are There Any Misconceptions About Equity Release I Should Be Aware Of?
What Truths Are Hidden Behind Equity Release Myths?
What Are the Facts vs. Fiction Regarding Equity Release?
In Conclusion
Equity release allows you to use your home’s value to borrow money and is a popular option among older homeowners in the UK.
Products such as a lifetime mortgage can give you access to funds without many of the disadvantages of a conventional loan and offer the guarantee that you will never owe more than your home eventually sells for.
We always recommend that you seek independent advice from a qualified equity release broker or advisor before making your mind up.
In the meantime, your questions about equity release myths should be answered now.
Access equity release information from trustworthy sources to navigate your options wisely.