Busting four equity release myths

What is equity release?

If you’re 55 or over and own your home, equity release could give you tax-free cash. It allows you to access some of your home’s value, usually as a lump sum.

Some people get confused about how equity release works. So, in this article we look at a few equity release myths, to sort the facts from the fiction.

Myth #1: My children could end up in debt

Equity release will impact the value of the estate that you leave your loved ones. But that doesn't mean they will get into debt.

We’ll explain why shortly, but first let’s look at the two types of equity release:

Lifetime mortgage

• With this type of equity release, you borrow money against the value of your home. But you still own the property.
• The loan and interest tend to be repaid when you (or the last living partner if you have a joint mortgage) die or move into long-term care. It's usually repaid from the sale of the home, but can be repaid by other means.
• If your beneficiaries sell your home after you die, they will receive any money that’s left once the loan and interest are repaid.
• The more time that passes between you taking out a lifetime mortgage and it being repaid, the more interest will accrue. However, with some lifetime mortgages you can pay off some or all of the interest monthly. This reduces the total amount that’s due at the end of a plan.

Home reversion plan

• With this type of equity release, you sell all or some of your home in return for tax-free cash. And you don’t have to move out of your home. However you won't receive the full market value for the share of your home that you sell.
• When the plan ends, which is when you (or the last borrower if you have a joint plan), dies or goes into permanent long-term care, the home reversion provider is entitled to their percentage of the property’s sale value. If the plan ends following death, your beneficiaries can inherit the remaining percentage of the property's value, minus any sale costs or inheritance tax that's due.

Some people worry that the money owed at the end of a plan might be greater than the sale value of the house. To avoid this, make sure you choose a provider that’s a member of the Equity Release Council and authorised by the Financial Conduct Authority.

All plans from approved providers come with a ‘no negative equity guarantee’. This means that the amount owed at the end of the plan will never exceed the value of the property it’s linked to. To find out more, you can read how equity release is protected.

Myth #2: The lifetime mortgage provider will own the whole house. 

Some people believe that equity release means selling their home and having the right to keep living in it. Whilst this is true of home reversion plans where some or all of the property is sold to the provider, it's different for lifetime mortgages. A lifetime mortgage is a form of borrowing against your property; a bit like a standard mortgage.

With a standard mortgage you pay off the loan and the interest every month. But with a lifetime mortgage the loan and the interest tend to be repaid when you (or the last surviving owner in a joint mortgage) die or move into long-term care.

With a lifetime mortgage, unless you choose to pay the full monthly interest payment, the interest builds on a compound basis. This means interest is charged on the loan amount and on the interest already charged

Even at the end of a plan, the lifetime mortgage provider won’t own the property. They only have the right to be paid whatever sum they are owed at that point. If your beneficiaries have enough money to repay, they don't need to sell the home if they don’t want to.

A lifetime mortgage provider will never own your home, but they can limit what you can do to the property.

Myth #3: With a joint equity release plan we could lose our home if one of us goes into a care home.

If you enter long-term care, your equity release plan will end and the loan funds will be due. But if you’ve taken out a joint equity release plan, it will continue as long as one of you still lives at home.

The same applies when one partner in a joint policy dies. If one of you still lives at home, you don’t have to pay off the equity release funds. It’s only if both of you die or need to move into long-term care that the plan will end. At this point, your home could be sold to pay off the loan.

If you or your partner needs to move into care after taking out equity release, this might affect your access to means-tested benefits.

It’s a good idea to seek financial advice if you’re thinking about a lifetime mortgage or home reversion plan. This will help you see the pros and cons of equity release.

Myth #4: Equity release only offers a one-off lump sum

Equity release could be used to cover the cost of home upgrades or to pass on to loved ones. But many people prefer to use it as a source of tax-free cash on top of their pension income.

If you would rather take a smaller initial lump sum and the ability to take ad hoc payments when required, you could opt for a drawdown lifetime mortgage. With a lifetime mortgage you can receive your money in a lump sum or a smaller amount initially then additional amounts from a pre-agreed limit.

One benefit of a drawdown lifetime mortgage is that interest only starts to be charged when the money is released. This means that interest is likely to accrue more slowly than it does with a lump sum lifetime mortgage.

If you’re ready to take the next step and want to find out more, you can get in touch with Saga Equity Release. Our service is provided by HUB Financial Solutions Limited.

You can chat through your options with our team of friendly advisers. They won’t put any pressure on you to proceed. But if you decide equity release is right for you, you’ll feel supported every step of the way.

Saga Equity Release don't offer home reversion plans. The product available through Saga Equity Release is the Saga Lifetime Mortgage which is an exclusive product provided by Just and can be tailored to meet your individual needs. If after taking advice you decide to take out a Saga Lifetime Mortgage you'll need to pay an advice fee of £799.