Carefully weighing up any major financial decision is essential, but there is a lot of information to get through when it comes to equity release.
Lifetime mortgages can be a way to tap into the value of your home and use the funds where you need to. But the whole concept can be a bit intimidating, and it’s not helped by some of the prevailing myths.
Seeing a specialist adviser is an essential part of the equity release process which is important as there are many pros and cons, and it’s a complicated product. But in the meantime, here are a few lifetime mortgage myths examined.
“My kids won’t inherit anything”
It is true that a lifetime mortgage will reduce the the inherited value of your home that you can leave to your loved ones. Depending on the type of plan you choose, your beneficiaries may receive nothing from the sale of your home, or only a reduced sum.
But it’s not an all or nothing situation, and there are ways to help mitigate this. With a lifetime mortgage, there may be options for:
- Ring-fencing, where you protect a portion of the value of your home to pass on to your loved ones. This will likely reduce how much you can borrow, though.
- Partial repayments, where you pay off some or all of the interest on the loan, or some of the capital in your lifetime, to reduce the overall cost of the loan.
- Drawdown, where you take partial amounts from the total amount available, rather than one large lump sum. With a drawdown lifetime mortgage, interest is only charged on what you take, not on the reserve, so it’s calculated on a smaller sum.
You could also use cash you release to give as a living inheritance to loved ones. This could perhaps help them with a deposit for a first home or the cost of a wedding, or with the general cost of living.
Bear in mind that the seven-year inheritance-tax rule applies to gifts you give away within seven years of your death, and this includes gifting through equity release.
» MORE: How a lifetime mortgage works
“I’ve still got a mortgage, so I’m not eligible”
It is possible to get a lifetime mortgage if you haven’t yet paid off your existing mortgage on your home.
You will need to clear your remaining mortgage, and any other loans secured against the property, with the cash you release (or using other funds) first. You can then use any remaining amount available to you for whatever you like.
The value of your home and how much you still owe on your mortgage will play a part in the lender’s decision.
» MORE: How equity release plans work
“I’ll be leaving family debt if my home loses value”
Most lifetime mortgages have a no negative equity guarantee, and this is always the case if the provider is a member of the Equity Release Council.
This means that if the value of your home goes down, after the property is sold your beneficiaries won’t have to pay any more to clear any outstanding debt that has been incurred as a result of the property losing value.
“I won’t be able to move home”
It is possible to move home with a lifetime mortgage. If your provider is a member of the Equity Release Council and the plan meets its standards, porting your mortgage later on will be an option.
The new property will need to meet the provider’s criteria, because it will want to be confident of its value and saleability in the future. Some types of homes, such as static homes, houseboats and retirement complexes, are unlikely to be accepted.
If you downsize to a new property, you may have to pay back some or even all of the loan. Though some lenders will let you repay your loan in full without a penalty if you downsize after a certain period of time.
If you can’t port the lifetime mortgage, you can still sell your home, but you’ll most likely have an early repayment charge for paying some or all of your loan back before you die or go into long-term care. An equity release adviser will explain the potential cost of this.
“It won’t be my home any more”
Your home will remain yours for as long as you’re living in it. Nothing needs to change on that front, and you’re still the legal owner. You’re not selling your property to the lender, you’re securing a loan against it.
So your name will stay on the deeds and you will continue to be responsible for all the usual maintenance and upkeep without any input from the provider. You can also benefit if your home increases in value over time.
If someone moves in with you after you take out an equity release plan, you will usually need to let your lifetime mortgage provider know.
“It isn’t a safe form of borrowing”
Equity release is highly regulated, and there are strict safeguards in place for homeowners taking out a lifetime mortgage or home reversion plan (the two main types):
- Providers and advisers are regulated by the Financial Conduct Authority.
- You have to take independent financial advice from a qualified equity release adviser before you can take out a lifetime mortgage plan.
- Providers that are members of the Equity Release Council must follow its strict standards, and advisers must be suitably qualified.
» MORE: How safe is equity release?
“I won’t be able to make repayments”
A key feature of a lifetime mortgage is that you don’t have to make ongoing repayments. The loan plus interest can be settled when your home is sold. But repayments can be an option if you can and want to at some point.
Flexible lifetime mortgage plans give you the option of repaying off some or all of the interest on the loan over time. This will help lessen the financial impact on your estate later on by reducing the debt and the amount of interest you pay. You may also be able to pay off some of the amount you borrowed, though you’ll usually get a penalty charge if you go over certain limits.
New lifetime mortgage plans sold by members of the Equity Release Council, which meet its standards, must offer the option of partial repayments from 28 March 2022. Importantly, there will be no penalty fee for partial early repayment.
If you want to pay off a lifetime mortgage early, in its entirety, because your circumstances have changed and you don’t want it any more, you can. But again, an early repayment charge may apply, on top of the original loan amount and interest that’s due. This can be costly, but your mortgage agreement (and your equity release adviser) should outline how this works, how it’s calculated, and the maximum you will pay.
“My partner will have to move out if I go first”
With a joint lifetime mortgage, when one partner goes into long-term care or dies, the other can stay in their home until their time comes, if that’s what they choose to do. So you can both live in your home for the rest of your lives.
However, if you live in the property with your partner (or anyone else) and the lifetime mortgage plan is in your name only, it’s a bit different. They will need separate legal advice and need to sign a waiver to say they don’t have the right to stay in the home when you die or go into long-term care.
It’s worth noting that there is no guarantee that you would be able to add a spouse or civil partner to the lifetime mortgage after you have taken it out.
“I shouldn’t mention it to my family”
It’s a good idea to talk to your family about your plans before you go ahead with a lifetime mortgage, if you’re comfortable doing that. This can give you a chance to keep them informed and, if needed, reassure them that you’re taking financial advice. It might even open up other, cheaper ways of raising the funds you need that you hadn’t thought of.
You could consider also take them along when you talk to an equity release adviser, so they can ask any questions they have. Communicating your reasons from the outset is likely to be better for everyone. Of course, the decision is yours to make, and it’s up to you how involved you want your family to be.
“It’s a last resort”
Equity release might have once been seen that way, but the market has evolved to be more flexible over the years. People take out lifetime mortgages for all sorts of reasons. This includes helping to fund the fun stuff, such as holidays and travel, hobbies and cars.
Other reasons might be to:
- help family out financially
- fund home renovations
- pay off debts
- pay for care support in the home
More generally, it could help people have a more comfortable retirement. According to the Equity Release Council, boosting pension income and savings and funding care support at home are two of the top three reasons homeowners aged 60 to 69 would consider equity release – along with travelling.
Whatever the reason for releasing equity from your home, it needs careful thought. Make sure you also consider other ways to borrow. An equity release adviser will help you to consider these, along with other important considerations, such as the potential impact on means-tested benefits.
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