We bust the common myths to get to the truth about equity release.
Sorting the fact from the fiction to uncover the truth about equity release
For homeowners aged 55 or over, who need some extra cash to supplement their income, equity release has a lot to offer. Equity release plans allow you to access some of the value tied up in your property, either as a lump-sum payment or a regular cash payment.
There are many misconceptions around equity release which can make it confusing when you take out equity release. Let’s take a look at four of the most common concerns that individuals have about equity release, to separate the truth from the myths.
Myth #1: There will be nothing left for my children to inherit and they might end up in debt
Taking out an equity release plan has an impact on the value of the estate you can leave to your loved ones.
Equity release involves borrowing money against the value of your home (a lifetime mortgage) or selling some or all of your home to a provider (a home reversion plan). With a lifetime mortgage the cash – plus interest – is usually repaid only when you (or the last remaining owner if you have a joint agreement) die or move into permanent long-term care:
Lifetime mortgage: With this type of equity release you still own your property, so when it’s sold after your death, any money remaining once the loan and interest is cleared can still be left to your family. It’s worth remembering that the longer the period between you signing up to a lifetime mortgage and it being repaid, the more interest will accrue. However, some lifetime mortgages now allow you to pay off some or all of the interest monthly, which will reduce the total amount due to be repaid at the end of a plan.
Home reversion plan: If you choose this type of plan, you can opt to sell just part of your home's market value – say 40% – to raise money. When the plan ends, the provider is entitled to 40% of your home’s sale value. This means that your family will be able to inherit 60% of what your property is worth, minus any sale costs or inheritance tax that might be payable.
One of the biggest worries for people thinking about equity release is that the cost at the end of a plan will be greater than the sale value of the house and having to settle the debt.
This would involve not only selling the home, but also having to find extra cash – either from the estate, or from another source – to cover the cost.
To avoid this situation, make sure that your chosen provider is a member of the Equity Release Council and is authorised by the Financial Conduct Authority, as plans from approved providers come with a ‘no negative equity guarantee’.
This means that, however long interest is allowed to roll up for, the amount owed by you or your family will never exceed the value of the property the plan is linked to. Find out more about how equity release is protected.
Truth about equity release #1: Although taking out equity release will reduce the amount of inheritance available for your children, it will never leave you or your children in debt to the provider.
Myth #2: The lifetime mortgage provider will own the whole house
Many people view the equity release process as a form of selling their home and having the right to continue living in it. In fact, a lifetime mortgage is just a form of borrowing against your property, similar to a normal mortgage.
But while with a standard mortgage you pay off the capital borrowed plus interest every month, if you take out a lifetime mortgage the capital plus interest costs roll up and are usually repayable when you, or the last owner in a joint agreement, dies or moves into permanent long-term care.
While providers of lifetime mortgages don’t actually own any of their customers’ houses, there can be limits or restrictions placed on what customers can do to their own properties for certain alterations. Even at the end of a lifetime mortgage, the provider has no right to the property: they only have the right to be paid whatever sum they are owed at that point.
If surviving family members have sufficient funds to repay the lifetime mortgage, for example from other assets in the estate, they won’t be forced to sell the home if they don’t wish to.
Truth about equity release #2: A lifetime mortgage is a loan secured against the value of your home, and that loan must be repaid only when you, or the last owner in a joint agreement, dies or goes into permanent long-term care. This doesn’t have to be repaid from the sale of your property, although in most cases this is the way repayment is funded.
Myth #3: We’ll lose our home if I need to go into a care home
Having to move permanently into a residential care home is one of the reasons an equity release plan can be brought to an end, with the money that has been borrowed repaid to the lender.
But if you’ve taken out equity release jointly, the plan will continue as long as one of you remains in the home – so if one of the joint borrowers moves into care, the equity release plan will keep running while the other partner stays in their property.
The same applies if one partner dies - as long as the surviving borrower remains in the home, there’s no obligation to pay off the equity release borrowing.
It’s only if both partners die or need to move into permanent care that the plan will end, and your home will probably be sold to pay off the lifetime mortgage or home reversion plan.
If you or your partner needs to move into care after taking out equity release, this might affect your entitlement to means-tested benefits.
Truth about equity release #3: If you have a joint equity release plan, it only ends when the last owner dies or goes into permanent long-term care.
Myth #4: Equity release only provides a one-off lump sum
While some equity release customers want to take a lump sum payment, perhaps to cover the cost of home improvements or to pass on to children, many people prefer to use the money to supplement their pension incomes.
It’s possible to do this by using an option known as a drawdown lifetime mortgage - this allows smaller sums to be taken on a regular basis.
Taking out a drawdown lifetime mortgage doesn't mean you get a guaranteed income for life, as the value of your property, among other factors, will limit the total amount you can take. But you should be able to boost your income over a reasonable period. Your adviser or equity release provider will be able to give you an illustration of how this might work.
One of the advantages of this approach is that interest only starts to be charged when the money is released – so interest is likely to accrue more slowly than it would on a lump sum lifetime mortgage.
Truth about equity release #4: The way you access the cash in your home can be flexible and will differ between providers. Gifting money may be subject to inheritance tax.
Find out more on the truth about equity release
There you have it, our rundown of 4 little-known truths about equity release. If you’re ready to take the next step to find out more, you can get in touch with Saga Equity Release. It's a no-obligation, no-pressure advice service dedicated to helping you understand all the details before you decide if equity release is the right option for you. Remember that you should make sure you fully understand all the implications before taking out equity release.
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