Many homeowners find themselves asset-rich but cash-poor in the run up to and during retirement, with equity release enabling them to unlock some of the wealth tied up in their property without having to sell their home.
The most popular type of equity release product is a lifetime mortgage. This is a long-term mortgage, but you do not need to make any monthly payments and you only need to repay the debt when you die or go into long term care and the property is sold. Of course, this is not without risks, not least that interest charges roll up over time, eating further into the value or any inheritance you might have planned to leave, and it could affect your entitlement to means-tested benefits. Read more in our article Equity release – what is it and how does it work?
But there can be plenty of misconceptions around lifetime mortgages, their benefits, the risks involved, and how they work.
Here, we consider some of the most common myths, and what you need to know.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Contents
- Myth 1: I’ve already got a mortgage so I can’t take out a lifetime mortgage
- Myth 2: I could end up owing more than my home is worth
- Myth 3: I’ll no longer own my home
- Myth 4: My partner will have to move out if I die first
- Myth 5: I can’t move home if I take out equity release
- Myth 6: I can’t borrow more later if I release equity
- Myth 7: I won’t leave any inheritance for my family
- Myth 8: Equity release isn’t a safe way to borrow money
- Myth 9: I won’t be able to make repayments
- Getting advice on equity release
Myth 1: I’ve already got a mortgage so I can’t take out a lifetime mortgage
If you have a standard mortgage outstanding on your home, this doesn’t mean that you’re unable to take out a lifetime mortgage. Whether you are accepted by a provider will depend on your personal circumstances, but provided you are aged over 55, you might be eligible.
However, one of the main reasons homeowners often choose to take out a lifetime mortgage is to pay off existing mortgage debt. Once their mortgage is repaid, they can put any surplus towards whatever they want. There are no monthly repayments to meet, but you may still be able to make partial repayments if you wish (see below). Read more in our guide Lifetime mortgages explained.
Myth 2: I could end up owing more than my home is worth
If you take out a lifetime mortgage with a provider that’s a member of the industry trade body Equity Release Council, this will come with a so-called ‘no negative equity guarantee’. This means that you will never owe more than the value of your home when it is sold. If the value of your property falls, and it eventually sells for less than the value of your equity release loan, the remaining balance is written off. However, this is an unlikely scenario, and usually any money that’s remaining from the sale after the equity release loan is repaid is transferred to your beneficiaries on your death.
However, equity release should never be entered into lightly, and whether it’s the right option for you requires careful consideration and regulated financial advice. Find out more about what you should think about in our article 8 questions to ask yourself if you’re considering equity release.
Myth 3: I’ll no longer own my home
You don’t sell your home to the equity release provider when you take out a lifetime mortgage, as you are simply borrowing against it, as you would with a standard mortgage. It’s just that the rules are different around repayment and how the product works.
You remain the owner of your home, your name remains on the property deeds, and you’ll still be responsible for any maintenance and general upkeep that’s needed. However, you may be required to let your equity release provider know if your personal circumstances change, such as if someone moves in with you after you take out a lifetime mortgage.
Myth 4: My partner will have to move out if I die first
It’s possible to take out a joint equity release plan to ensure that your partner can remain in your home if you were to die or move into long-term care before them. Provided both applicants meet the eligibility criteria for taking out the lifetime mortgage, a joint plan shouldn’t be an issue.
However, if the lifetime mortgage is in your name only, things are different. In this scenario, your partner may be asked to sign an agreement stating that they don’t have the right to stay in the home if you die or move into care. You may not be able to add them to the lifetime mortgage documents after you have taken out a plan.
Bear in mind, too, that equity release may not be suitable for you, or you may not be eligible if you have dependents living with you as they may not have the right to continue living in the property if you die or move into care.
Myth 5: I can’t move home if I take out equity release
Some, but not all, equity release schemes enable you to move house in the future. Check the charges involved so you’re sure you understand how this works, and your future options.
If your equity release provider is a member of the Equity Release Council, you can usually move home with a lifetime mortgage, as long as your provider is comfortable that your new home would sell for enough to repay the debt.
However, bear in mind that if you might want to make a major lifestyle change, such as moving to a retirement complex, or houseboat, it’s unlikely that you’ll be able to take your lifetime mortgage with you. If you downsize your property, you may have to repay some or all of the loan, although you may be able to do this penalty-free after a number of years.
If your equity release plan cannot be transferred to a new property, you may still be able to move home, but you’ll probably have to pay an early repayment charge for paying some or all of your loan back early.
Myth 6: I can’t borrow more later if I release equity
If you need extra funds, equity release isn’t your only option. However, you may be able to secure additional funds from your existing lifetime mortgage provider, which you can release with a drawdown plan, or a further lump sum.
Alternatively, you may be able to take out another equity release plan with a different provider to repay your current lender and provide you with additional funds. However, whether this is possible will depend on the terms of your existing agreement and circumstances.
Myth 7: I won’t leave any inheritance for my family
Releasing equity from your home may significantly reduce the value of any inheritance you plan to leave. However, you can choose a lifetime mortgage that enables you to protect, or ‘ring-fence’, some of your equity for inheritance purposes. This means there will be less of your property’s value to borrow against, but ensures there’s some to pass onto your beneficiaries.
Alternatively, you may also be able to provide an early inheritance by using equity release, but bear in mind that this will ultimately reduce the value of your estate. In this scenario, you also need to consider the seven-year inheritance tax (IHT) rule on ‘potentially exempt transfers’ (PETs) If you die within seven years of gifting money, the amount will fall under your estate for inheritance tax purposes. Read more in our article Inheritance tax: what are potentially exempt transfers?
Myth 8: Equity release isn’t a safe way to borrow money
Whilst previously it didn’t have the best reputation, the equity release market is now properly regulated, and has evolved over recent years so that plans come with plenty of safeguards. The equity release market is covered by the Financial Services Compensation Scheme (FCSC), which offers consumers protection if something goes wrong with the products they’ve taken out. Providers must be authorised by the Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
Provided you use an equity release provider that’s a member of trade body the Equity Release Council, you benefit from a number of safeguards, such as the previously mentioned ‘no negative equity’ guarantee, so you’ll never owe more than the value of your home. The Council’s code also includes a cap on interest rates that can be charged for lifetime mortgages, and a rule stating that you can’t be forced to leave your home by the provider. Read more in our article Is equity release safe?
Myth 9: I won’t be able to make repayments
One of the benefits of a lifetime mortgage for many people is that you don’t have to make ongoing repayments. The money you borrow only needs to be repaid when your home is sold, or you move into care.
However, you are able to make penalty-free partial repayments if you wish to reduce the amount you’ve borrowed, and that needs to be repaid at a later date. This rule was added to the Equity Release Council’s list of safeguards in March 2022. Find out more in our article New Equity Release Council safeguard could help customers save millions.
Getting advice on equity release
Before taking out an equity release plan, you need to be fully aware of the advantages and disadvantages, and whether it’s definitely the right decision for your personal circumstances. There may be alternatives you should consider before making any decisions. Read more in our guide Equity release – what are the risks?
Your first step should be to seek advice from a qualified financial advisor.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
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