Myth: equity release is expensive
When you use a lifetime mortgage to take a lump sum, or receive an income, interest will be added to the total loan amount. This means you don’t have to pay off any of the interest over your lifetime, and instead it is repaid when the last survivor dies or moves into long term care.
As a result of compound interest, which means the interest that is charged on the interest, the amount you owe will increase over time, meaning that a lifetime mortgage could be an expensive option.
However if you want to manage the amount you owe, some products offer the option to repay some or all of the interest. This means if you choose to pay all the interest, the interest won’t roll up over time and the original loan amount stays the same, as long as you maintain this interest payment.
As with all financial decisions, you should make sure that a lifetime mortgage is right for you before proceeding. There may be cheaper ways to borrow.
Myth: using equity release means I won’t be able to leave my family an inheritance
Equity release can actually be used to gift your children, or grandchildren, an early ‘living’ inheritance. This can give them support when it’s possibly more beneficial and they are most able to enjoy it or put it to good use. Recipients of these ‘gifts’ may have to pay inheritance tax in the future.
This will reduce the equity left in your home and the value of any inheritance.
If you do want to access your home’s equity to fund your retirement, but leaving an inheritance is important to you, you can protect a proportion by choosing a product that offers an inheritance protection guarantee option. This will reduce the amount that you can borrow.
Myth: equity release means I’ll be thrown out of my home
Having a lifetime mortgage does not mean you’re selling your home to the lender. It’s a loan secured against your home that will be repaid when the last remaining borrower dies or moves out of the home into long term care. One thing to be aware of is that staying in your home is subject to the terms and conditions of the mortgage. If you fail to maintain the property, it may result in the forced sale of the property and loss of Inheritance Protection, if you've taken it.
Myth: equity release means I could end up owning more than the value of my home
Today’s market is highly regulated, with the Financial Conduct Authority (FCA) introducing important consumer protections. Most lenders are also members of the Equity Release Council.
This means that any plan from a regulated provider will come with a no-negative-equity guarantee. If your house falls in value, and the sale of your property isn’t enough to pay off the remaining debt, neither you nor your estate will be liable to pay any more. Providing that you meet the terms and conditions of the product you are buying and the property is sold for the best price reasonably obtainable, you won’t repay more than the value of your home when it’s sold - even if that’s less than the amount owed.
Myth: if I use equity release, I have to take all my money at once
A typical lifetime mortgage releases a percentage of your housing equity as a lump sum. You‘ll need to pay off your existing mortgage, if you have one, and you might have to pay an early repayment charge to your lender.
With some modern lifetime mortgage products you don’t have to take all the money in one go. Some providers offer the option to ‘draw down’ your housing wealth in stages. Taking the money in smaller sums, rather than in one go, also reduces the amount of unpaid interest added to the loan each month. A different interest rate may apply on any money taken in stages.
There are also income lifetime mortgage products, that provide a steady income over a selected term.