Are you curious about equity release and how it works? If so, you’re in the right place. Each month, over 7,000 people come to us for advice on equity release. Today, we’re going to share four little-known truths about this popular way to borrow money.
We understand that the process of equity release might seem confusing. It’s a big step, and it’s important to know the facts before you make a decision, which is why we’re here to help you.
In this article, we’ll cover:
What equity release is and how it works.
The risks that come with releasing equity from your home.
The difference between lifetime mortgages and home reversion schemes.
How to get a realistic quote for equity release.
Four little-known facts about equity release.
We have a lot of experience and knowledge about equity release, and we’re keen to share it with you. We know how important your home is, and we want to help you make the best decision for your future. So, let’s start learning about equity release together.
Hold on – what’s equity release? (Recap!)
Equity release is a method to borrow money exclusively available to senior homeowners without a residential mortgage debt or any other debt secured by their home.
The debt is only repaid from the sale proceeds of their home. But their home will only need to be sold when they leave their home, which is usually when they move into an aged-care facility or pass away.
Little-known truths about equity release
The equity release industry has been cleaned up over recent decades with much fewer equity release horror stories hitting the press.
But lots of homeowners still don’t know exactly how they work today, especially when it comes to tax on equity release. Here are some of the truths about equity release you don’t always hear!
#1: You don’t have to take a lump sum
Despite what many people believe, equity release plans don’t have to give you a lump sum loan. Some lenders will provide the loan as a drawdown facility, which is when you take an initial sum and can access further amounts when you prefer.
The benefits of a drawdown equity release plan are:
Interest is only applied on the amount taken – not the amount approved. This can save you money.
Drawdowns might help you budget for projects
Drawdowns coils top you from increasing your wealth at once and becoming ineligible for means-tested benefits.
#2: You can still move home
Many lenders will now let you move home and take your equity release plan with you. This is the case as long as the new property has the same or a higher value and meets other lender criteria.
You might not be able to move into some properties which will be harder for the lender to sell, such as boathouses or properties above commercial premises.
#3: …And you can downsize (without penalty!)
You can also downsize to a less valuable property if you pay off the required percentage of the loan. You can even do this without having to pay a hefty early repayment charge on the loan, as long as you have a downsizing clause within the equity release agreement.
#4: You still own your home
One of the biggest myths in the industry is that you no longer own your home. Over 99% of equity release plans taken out are lifetime mortgages, and with a lifetime mortgage, you still own 100% of your home.
What is the downside to equity release?
The major downside to equity release plans is that they can become very expensive to repay. This applies to both lifetime mortgages and home reversion plans.
With the more common lifetime mortgage, the debt can easily double or triple over a couple of decades.
This can severely reduce the value of your estate that you pass on to loved ones.
Remember that equity release is still borrowing and that there are other alternatives to equity release that you might consider, such as:
Downsizing
Renting part of your home out
Asking family members for help
Lifetime mortgages and home reversion schemes
The two types of equity release schemes in the UK are called lifetime mortgages and home reversion schemes.
We’ll start by explaining a lifetime mortgage as these plans are a lot more common. They provide a percentage of the property value (usually up to 60%) and add interest on the loan amount.
The interest gets added each month, but because no monthly payments are needed, the debt simply gets bigger over time. It’s possible to voluntarily pay the interest off each month to stop the debt from growing.
A home reversion plan is different. No interest is added to the loan, but you exchange the loan for a percentage of your property. The percentage of your property you give up is much more valuable than the loan you receive.
For example, you might receive 30% of a £150,000 property (£45,000) but have to give up 75% of the property’s future sale proceeds (£112,500 depending on house valuation changes).
You can learn more about both by reading this equity release explanation guide.
Is equity release really a good idea?
Despite the potential costs to repay an equity release plan, it can still be a good idea for some homeowners. The money could help fund many different things and improve the quality of life in your twilight years.
It’s an easier decision for those who don’t have children to pass on their home and wealth, or if your children are already financially secure. It’s worth taking the time to read all of the equity release advantages and disadvantages.
Do you lose money with equity release?
You don’t lose money with an equity release plan, but you do pay the lender back more money than you receive like any other loan.
Your estate beneficiaries lose out because they don’t receive your property in the future.
How safe is equity release?
Equity release is much safer than it once was. There are Equity Release Council standards to keep equity release safe, including:
Mandatory equity release advice – you must receive professional equity release advice before signing up for a lifetime mortgage. This ensures you are fully aware of the consequences and that it’s the right move for your needs.
No negative equity guarantee– ERC members can never recover more than what the property eventually sells for. You or loved ones never have to pay anything more than 100% of the sale proceeds – even if the debt exceeds this amount.
Other guarantees and assurances – there are further guarantees when using an Equity Release Council member, such as allowing you to move to a suitable property and take your plan with you.
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