If you’re no longer working and own your home, you might have considered equity release to help cover living costs. Undoubtedly, you will have heard all sorts of advice and opinions on equity release which can leave you wondering whether it is the best thing for you.
Firstly, you should know that there are two types of equity release: lifetime mortgage and home reversion. Most people opt for a lifetime mortgage, with home reversion plans making up around 1% of the market.
A lifetime mortgage allows you to borrow money against the value of your home. With a home reversion, some or all of your home is sold to the provider in exchange for a cash sum.
Ultimately, no one can make the choice for you, but we are here to clear up some of the myths that surround equity release so that you can be confident in your decision.
Myth: You won’t be able to leave any inheritance
One of the most common concerns voiced over equity release is that there will be nothing left to leave to loved ones after you die. This does not have to be the case, and there are plenty of providers which will allow you to protect a portion of your property’s equity for inheritance.
In fact, equity release can enable you to provide loved ones with financial support before you die via early inheritance. More than half of first-time buyers, for example, receive financial help from their parents. With the average new equity release client unlocking over £100,000 from their homes, there should be plenty for both you and your family to meet your financial goals.
Myth: You can end up owing more than your home is worth
Another common concern among homeowners considering equity release is that they can end up owing more than their home is worth. However, you should rest assured that there are safeguards in place to ensure this doesn’t happen.
We only work with providers approved by the Equity Release Council, which means that your mortgage will come with a no-negative-equity guarantee. If the market value of your home becomes lower than the amount of your equity release loan, the remaining balance will be written off. If there are any funds from the sale left once the mortgage has been repaid these will usually be paid to your estate or distributed in accordance with your will.
Myth: You need to have paid off your current mortgage
Lots of people believe that you can only make use of equity release if you own the full value of your home and have paid off any existing mortgages. However, this is not true and releasing equity from your home can be a useful way to pay off your existing mortgage, particularly if you are wanting to retire before having come to the end of your mortgage term.
Myth: You will have to make monthly payments
It is possible, but not necessary, to make monthly payments with a lifetime mortgage. Generally, lenders will allow you to make optional, penalty-free repayments which cover up to 10% of the mortgage balance per year, or some people choose to clear the interest monthly.
If you don’t want to make payments, you don’t have to. In this case, the interest on the amount you’ve borrowed will add up over time. The interest plus the initial amount borrowed will be paid back when the home is sold, or when the last homeowner dies or moves into permanent long-term care. If you begin making payments and later decide against it, the mortgage does not default but automatically switches to rolled-up interest.
Myth: You should take the biggest sum possible
If you opt for a lifetime mortgage, it might be more cost-effective to take out a series of smaller loans, rather than one big loan. This will mean you pay less interest over time. It is worth speaking to a later life adviser about your financial goals so that you can check you are borrowing the right amount at the right time.
Myth: You will no longer own your own home
If you take out a lifetime mortgage, you will still own your home. With this kind of product, you are simply borrowing against the value of your home, with the loan to be repaid when you permanently leave the home due to death or entering long-term care. You can still move home after taking out a lifetime mortgage, with some lenders providing the ability to port your mortgage to a new home.
A home reversion plan does involve selling some or all of your home in exchange for a cash lump sum, so it is worth being aware of this.
And remember…
If you are curious about equity release, we provide advice on a fee-free basis. Book an appointment with us and we can begin talking through your options.
