The popularity of equity release has grown significantly in recent years, and for good reason. It has changed considerably over time and is proving to be a financial solution for many people, so industry experts suggest it will continue to grow. However, despite its appeal to some, there continue to be misconceptions amongst the public about how equity release works.

Not realising these changes have taken place, many people do not give equity release any consideration, even though it could prove to be a beneficial option to boost their retirement funds, provide a solution to debt or home improvement costs, or simply provide the funds they are looking for.

Before we explore these common equity release myths, it’s worth explaining what equity release is.

Equity release is aimed at those aged over 55 and, in simple terms, allows them to release money or ‘equity’ from their home without having to move. There are two types of products that allow this:

  • Lifetime Mortgages – A tax-free amount secured against your home, similar to a standard mortgage, with interest being added to the debt if you choose not to make repayments. Payments can be made if required, but they do not have to be, in which case the loan will increase over time.
  • Home Reversion Plans – Where you sell part or all of your home in return for a tax-free lump sum. These are a less common option but 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 standard mortgage in that a charge is placed on the property, but you retain ownership of your home for as long as you live there. This is because the loan does not become repayable until death or when you permanently vacate the property (by selling it or moving into long-term care).

No monthly repayments towards a Lifetime Mortgage are necessary, but some lenders allow full or partial repayments if required.

Doing so ensures that a higher proportion of your 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 regardless of your property’s future value when it is eventually vacated. The main reason people may choose Home Reversion is because they can sometimes release a higher amount than with a Lifetime Mortgage.

Even in this case, you can remain in the property until death or until you sell or move into long-term care. You always retain ownership of the initial percentage of the property that has not been sold to the provider.

Myth 2: The interest rates are very high

Yes, interest rates are generally higher than some residential mortgage products, but at the time of writing (September 2019) they were lower than ever before. With more lenders entering the market and increased demand, rates have continued to fall and have been available from as low as 3.50%.

They are often fixed for the life of the mortgage, meaning they are unaffected by future external factors such as changes to the Bank of England base rate.

In light of these lower rates, it can be worthwhile reviewing any existing Lifetime Mortgage, as it is often possible to switch to a newer product with a significantly lower interest 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 must offer a No Negative Equity Guarantee. This means that neither you nor your beneficiaries will ever have to repay more than your property is worth when the loan is eventually repaid following death or moving into long-term care.

Myth 4: I can’t make repayments on a Lifetime Mortgage

As mentioned in Myth 1, many lenders offer flexible features that allow you to make full or partial interest repayments each month.

The benefit of doing this is that the overall debt remains lower throughout the life of the loan, allowing for potential future withdrawals and helping preserve more inheritance for your beneficiaries.

Myth 5: I can’t use Equity Release for a purchase

Lenders allow Equity Release products to be used to purchase a new property, provided it meets their lending criteria.

In addition, you can usually transfer your existing equity release loan to a new property if you move, again subject to the lender’s requirements.

If you are considering equity release as an option to help fund your retirement, it’s important to 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 upon request. Why not give us a call?

Learn more about our Equity Release services.

Or contact us directly on 01494 778899 or via email at info@pffinancial.co.uk.