Equity Release Myths
EQUITY RELEASE – THE MYTHS
Equity Release has something of a “Marmite” reputation. On the one hand popularity has soared in recent years and has helped improve the lives of many people. And yet for others, Equity Release has a lingering hangover from the unregulated days of the 1980s which puts people off from considering it. So let’s address these myths and misconceptions:
EQUITY RELEASE IS UNSAFE AND UNREGULATED
The Equity Release industry has been fully regulated since 2004. The Financial Conduct Authority (FCA) requires Equity Release Advisers to hold the necessary FCA Equity Release permissions and maintain high standards of deliverance of Equity Release advice. Regulation also means that today’s Equity Release consumers receive levels of protection that were not available in the early days of Equity Release. In addition, in 1991 SHIP (Safe Home Income Plans) was created which introduced a range of product standards to protect Equity Release consumers, most notably, the “No Negative Equity Guarantee”. SHIP has since evolved into the Equity Release Council which is dedicated to protecting people who hold Equity Release plans. You should expect your Equity Release Adviser and Equity Release plan provider to be a member of the Equity Release Council who requires members to observe its Code of Practice. Hallmark Later Life Lending Limited is a member of the Equity Release Council.
I’LL END UP OWING MORE THAN MY HOME IS WORTH
This misconception relates to a Lifetime Mortgage which doesn’t require you to make monthly repayments (although you can if you wish), instead, the monthly interest rolls-up thereby increasing the mortgage balance. However, you can never owe more than your home is worth (“negative equity”) because Lifetime Mortgages approved by the Equity Release Council have a no negative equity guarantee. So, however unlikely, if the mortgage balance ever was to exceed the value of your property, you won’t be repossessed, or made to sell your home, or required to make monthly repayments. Nor will your estate or family be required to make up the shortfall when your property is eventually sold. This is because the Lifetime Mortgage lender accepts the loss under the terms of the Equity Release Council’s code of practice. Naturally, Lifetime Mortgage lenders don’t set out to make a loss so they are careful with how much they’ll lend you when you apply.
IT’S ALRIGHT NOW BUT WHAT IF INTEREST RATES INCREASED
This is another Lifetime Mortgage misconception. Under the Equity Release Council’s code of practice, the interest rate on a Lifetime Mortgage is fixed for the life of the mortgage. Before you enter into a Lifetime Mortgage you’ll be provided with a personal illustration, and if you ago ahead, a Mortgage Offer, both of which will detail the future increasing balance of the Lifetime Mortgage year by year. So before entering into a Lifetime Mortgage you’ll know exactly what the mortgage balance will be in future years.
IF PROPERTY PRICES FALL I’LL BE REQUIRED TO MAKE MONTHLY REPAYMENTS TO A LIFETIME MORTGAGE
There is NO requirement, nor there EVER be a requirement, for you to make monthly payments to a Lifetime Mortgage. This is another Equity Release Council protection measure. You can however make voluntary payments if you wish and typically a Lifetime Mortgage allows you to make voluntary penalty-free repayments of up to 10% per year of the mortgage balance in the early years and more in later years.
ONCE IT’S STARTED YOU’LL BE STUCK WITH EQUITY RELEASE
In this respect a Later Life Lending mortgage, a Retirement Interest Only (RIO) mortgage, and a Lifetime Mortgage are more flexible than a Home Reversion plans.
It is NOT a condition of a Later Life Lending mortgage, a Retirement Interest Only (RIO) mortgage, or a Lifetime Mortgage that you keep the mortgage for the rest of your life. If your plans or circumstances change you can move home, or downsize, subject to terms and conditions and acceptance of the new property. You can even pay the mortgage off if you come into funds unexpectantly, although this may incur Early Repayment Charges.
A Home Reversion plan can be transferred to a new property (although not to sheltered retirement accommodation) subject to terms and conditions. However, if the new property is not acceptable to the Home Reversion provider you would have the buy the property back (or the provider’s share of it) at the FULL market value which could be very expensive and might not leave you with enough money to buy the new property. Similarly, if you unexpectantly come into funds and want to end the Home Reversion, you’ll need to buy the property back (or the provider’s share of it) at the FULL market value.
These distinct differences should therefore be borne in mind when considering the most suitable Equity Release product for you.
I’LL NO LONGER OWN MY PROPERTY
With a respect a Later Life Lending mortgage, a Retirement Interest Only (RIO) mortgage, and a Lifetime Mortgage you will continue to own your home just as you have with any previous mortgage.
With a Home Reversion plan you do actually sell your home, or a proportion of it, to a Home Reversion provider although you are free to continue to live in the property rent free for life, or until you leave the property. If you sell the whole of the property to the Home Reversion provider in return for the maximum cash release you will no longer own the property, but if you sell only a proportion of in return for a lesser cash release you will retain part ownership jointly with the Home Reversion provider.
If retaining ownership of your property is important to you, simply don’t choose Home Reversion plan for your Equity Release.
I CAN’T RELEASE EQUITY FROM MY HOME BECAUSE I STILL HAVE A MORTGAGE ON IT
Yes you can. An existing mortgage can be repaid by an Equity Release plan. In fact, mortgage prisoners and home owners with interest only mortgages who’s mortgages are coming to end with no means of repayment, are turning to Equity Release which can provide an excellent solution and enable homeowners with these problems to keep their homes. See our page Equity Release Solutions.
THERE WON’T BE ANYTHING TO LEAVE MY CHILDREN
Life Lending mortgages and Retirement Interest Only (RIO) mortgages are Interest Only mortgages and therefore require monthly interest payments which maintain the mortgage balance at the original level.
A Lifetime Mortgage, which requires no monthly repayments and therefore the mortgage balance increases, allows you to ring-fence a proportion of your property to leave to your children. This is typically referred to as “Dependent Protection” or “Inheritance Guarantee”, or similar. For example, if you’d like to be certain of leaving 25% of the property value to your children, your maximum Lifetime Mortgage will be based on 75% of the property value, not its full value. This safeguards a minimum 25% of the eventual sale price of your home for your children. However, your children could receive more than 25% depending on the balance of your Lifetime Mortgage at the time, but not less than the protected 25%.
For Home Reversion, simply by not taking the maximum Equity Release from your property you retain part ownership to leave to your children. So again, if you’d like to leave 25% of the property value to your children your Home Reversion plan will be based on 75% of the property value, not its full value.
The reality today is that Equity Release is very consumer friendly and comes with a great deal of consumer protection. Furthermore, today’s Equity Release products can do far more than simply top-up the bank account. They can provide dynamic solutions to many financial situations and obstacles which we explore on our page Equity Release Solutions.
MONEY RELEASED VIA A LIFETIME MORTGAGE IS PAID BACK AFTER YOU DIE FROM YOUR ESTATE. THIS MEANS THE INHERITENCE YOU LEAVE TO YOUR LOVED ONES COULD GO DOWN, AND IN CERTAIN CIRCUMSTANCES, COULD COMPLETELY DIMINISH. PLEASE ASK FOR A PERSONAL ILLUSTRATION
HOME REVERSION INVOLVES SELLING PART OR ALL OF YOUR HOME TO A HOME REVERSION PROVIDER WHICH WILL REDUCE, POSSIBLY ENTIRELY, THE INHERITENCE YOU LEAVE TO YOUR LOVED ONES