Historically, Equity Release has received a lot of negative press, but this is largely due to people receiving misguided and unregulated advice. With the correct planning and advice the common pitfalls of Equity Release can be avoided. When done right it can be an excellent way to release money from the home to help pay for later life living.
Age Space has consulted with Equity Release experts to put together this page on 5 of the most common Equity Release pitfalls and steps you can take to avoid them. We have also highlighted 9 of the most common myths so you have all the facts at your disposal.
1: Choose an Equity Release provider that offers a No Negative Equity Guarantee
The biggest fear that some people have is that they will end up owing back to the provider more money in interest payments than the sum on sale of their house.
Taking out Equity Release with a No Negative Equity Guarantee means that this will never happen. Having such a guarantee is a confirmation from the provider that the sum owed back will never be more than the sale amount.
All regulated providers are required to offer a No Negative Equity Guarantee. The Financial Conduct Authority (FCA) is the regulating body, and they hold a register of companies. Look for the FCA logo on company letterhead/website.
2. Choose an Equity Release provider that offers a partial repayment option
When you take out a Lifetime Mortgage (Equity Release plan), there are different options for paying the interest. You can either let the interest from the loan ‘roll-up’, or make repayments towards the loan during your lifetime. This latter option is known as partial repayment, or an ‘interest-only’ loan.
Whether you pay none, some or all of the interest, regular repayments will reduce the total mortgage to pay back upon death or sale of the property.
Always ask Equity Release providers if they offer a partial repayment option, as it could save you money in the long-run.
3. Seek advice from an independent and authorised Equity Release adviser
To avoid any of the potential pitfalls of Equity Release, you should obtain advice from an independent financial adviser who is authorised and regulated by the Financial Conduct Authority (FCA).
The FCA also state that if you do not take independent financial advice, and end up with an Equity Release plan that does not work out as you had expected, then you will have fewer grounds for making a complaint. Independent advice can help you avoid encountering any Equity Release problems in the future.
4. Consider alternatives to Equity Release
There are alternatives to Equity Release that may be more appropriate for your circumstances. We urge you and your family to take independent financial advice and consider the various options, such as downsizing.
A good Equity Release advisor will talk you through the best options based on your circumstances.
5. Consider if Equity Release will affect your access to means-tested benefits
If your parent or relative is claiming means-tested benefits for which their annual income determines their eligibility then please be warned: there is a danger that Equity Release may well rule them out of receiving such benefits because it is considered to be part of their annual income.
All good Equity Release advisers will help you to identify if an Equity Release scheme will affect access to means-tested benefits.
Equity Release Myths
One of the main reasons that people do not consider Equity Release is because they do not fully understand it — or they are misled by any number of myths and misconceptions.
Experts have helped us identify 9 of the most common myths about Equity Release — and explain the truth.
Myth 1: Equity Release is a last resort
Releasing the value locked-up in your home is just one of several ways of achieving your objectives. It’s important that Equity Release is considered equally alongside other means, such as downsizing, other forms of borrowing, drawing down from pensions and investments. A good adviser will ensure that all possible alternatives are fully explored, helping you to understand the advantages and disadvantages of all options.
Myth 2: You won’t be able to move home
Any lifetime mortgage that meets the Equity Release Council’s rules, allows you to transfer the loan to a new home, providing it meets the lender’s terms and criteria at the time. Sometimes, the lender may require a partial repayment of the loan to keep it within its lending limits, but they cannot charge you any penalties when they ask you to do this.
Myth 3: You’ll saddle your children with a big debt
If your lifetime mortgage meets the Equity Release Council’s 'no negative equity guarantee' rule and you have kept to the terms and conditions of your lifetime mortgage - your loved ones won’t pick up a bill if the property sells for less than the sum you owe the lender.
Myth 4: You won’t be allowed to pay anything off the mortgage
Nowadays, many lifetime mortgages, allow you to make partial repayments without early repayment charges. Usually, the amount that can be repaid is up to a fixed percentage of the loan each year, with 10% of the borrowing being pretty common and some going as high as 40% a year, without penalties. Other products allow you to pay the interest, choosing anything from a very low £25 per month, all the way up to every penny of interest charged.
This sort of flexibility isn’t offered on any other type of loan, allowing the borrower to maintain control over what they feel is affordable and desirable to pay, if they do so at all.
Myth 5: You can’t take Equity Release if you already have a mortgage
You can’t have 2 mortgages on your home. If you already have a mortgage, this will be repaid by the Equity Release lender before any surplus money is passed to you, provided the new lifetime mortgage offers a large enough sum to clear the old mortgage. If there’s a shortfall in repaying your existing mortgage, you would need to meet it from savings, a pension, or any other means you might have.
Myth 6: You won’t be able to leave your property as an inheritance
A lifetime mortgage is usually repaid by selling the property, after the last owner moves into permanent long-term care or passes away. Any money left over can go to your beneficiaries. Also, some products let you ring-fence a portion of your home’s equity to leave as an inheritance for loved ones.
Myth 7: Equity Release is unsafe and unregulated
Lifetime mortgages are regulated by the Financial Conduct Authority. Furthermore, most respected providers of Equity Release plans are members of the Equity Release Council, who require that they provide certain guarantees and safeguards for your protection.
Myth 8: You’ll lose ownership and control of the property
With a lifetime mortgage, you stay the owner of your home so if it increases in value, it is you who benefits, not the lender. You have the legal right to live in your own home forever, providing you meet the terms and conditions of your mortgage.
Myth 9: You’ll end up owing more than the value of your home
All lifetime mortgages that adhere to the Equity Release Council rules, must feature a ‘No Negative Equity Guarantee’. This means you’ll never owe more than your home is worth once sold, even if this is less than the amount owed. This applies upon death or permanently moving into long term care. The guarantee only applies when you meet the product’s terms and conditions.