The popularity of equity release has grown significantly in recent years and for good reasons. It has changed in recent years is proving to be a financial solution for many people so industry experts suggest it will continue to grow. However, despite the appeal to some, there continues to be misconceptions amongst the public around how equity release works. Not realising changes have taken place, many people do not give equity release any consideration even though it could prove to be a beneficial option for them to either boost their retirement funds, be a solution to a debt or home improvement issue or just provide the funds they are looking for.
Before we explore these myths, it’s worth explaining what equity release is.
Equity Release is only aimed at those aged over 55’s and, in simple terms, allows them to release money or ‘equity’ from their home without having to move. There are 2 types of products that allow this:
Lifetime Mortgages – a tax-free amount secured against your home similar to a generic mortgage with interest being added to the debt if you choose not to pay it. Payments can be made if required but they do not have to be in which case the loan will increase over time.
Home Reversion Plan – where you sell part or all of your home in retain for a tax-free lump sum. These are less common option but they can allow you to release more than you would with a lifetime mortgage.
Myth 1: I’ll have to give away ownership of my home
As stated above, the most common form of equity release is a lifetime mortgage. It works in a similar way to a generic mortgage in that a charge is placed on the property, but you will retain ownership of the property for as long as you live there. This is due to the ‘loan’ not becoming repayable until death or when you vacate the property (sell or go into care). No monthly payments towards a Lifetime Mortgage are necessary but they can be made either partially or in full on some mortgage if required. Doing so ensures a higher proportion of a property’s equity is retained.
Home Reversion Plans are very different and do involve selling part or all of your home. The percentage released remains constant no matter what the property’s future value is when it is eventually vacated. The main reason people may opt for Home Reversion is because they can sometimes release a required higher amount than a Lifetime Mortgage. Even in this case, you can remain in the property until death or when you sell or go into long term care. You always retain the initial portion/percentage of the property not sold to the lender.
Myth 2: The interest rates are very high
Yes, interest rates are generally higher than some residential products but they at the time of writing (Sept 2019) they are lower than we’ve ever seen. With more lenders entering the market and higher demand, rates in recent times have been continuously dropping and can be obtained as low as 3.50%. They are often fixed for the life of the mortgage too so unaffected by future external factors such as Bank of England base rate changes. In fact, in light of the lower rates, it’s very worthwhile reviewing any existing Lifetime Mortgage as we have often been able to switch an old one to a new one with a much lower rate!
Myth 3: I’ll owe more than the value of my home
To adhere to the Equity Release Council (ERC) Statement of Principles, all members most offer a ‘No Negative Equity Guarantee’. This means that neither you nor your beneficiaries will have to repay more than your property is worth upon death or moving into long term care.
Myth 4: I can’t make repayments on a Lifetime Mortgage
As stated in Myth 1, many lenders have useful flexible features on their products which include allowing you to make full or partial interest payments every month. The benefit of this is the initial debt will remain lower throughout the course of the loan allowing either further withdrawals later and/or providing beneficiaries with some inheritance.
Myth 5: I can’t use Equity Release for a purchase
Lenders always allow Equity Release products to be used to purchase a new property providing the property meets their lending criteria. In addition, you can move your existing equity release loan on your property to a new one if you move, again providing it fits within the lenders’ requirements.
If you are considering equity release as an option to help you fund your retirement, it’s important you speak to a specialist adviser and involve your loved ones when making your decision.
At PF Financial we offer a FREE guidance and advice service and are available for home visits at your request. Why not give us a call?
Learn more about our Equity Release services here