A lifetime mortgage, the UK’s most popular type of equity release, means accessing a portion of your home’s wealth as a tax-free lump sum. This sum, plus the interest accrued, need only be repaid upon your death or when you move into long-term care and your property is sold.
Equity release myth one: I’ll end up owing more than my home is worth
Provided you take out an equity release plan with a provider approved by the Equity Release Council, your plan will come with a no-negative-equity guarantee, which ensures you will never owe more than the value of your home when it is sold.
In the unlikely event that your home sells for less than the amount of the mortgage, the remaining balance will be written off. Typically, once the mortgage has been repaid, any remaining funds will be paid to you or the beneficiaries named in your will.
Equity release myth two: I’ll have to make monthly payments with a lifetime mortgage
There are no monthly payments to make with a lifetime mortgage – unless you choose to make them, of course. Some plans allow you to make optional, penalty-free repayments of up to 10% per year of the mortgage balance.
If you choose not to do this, interest on the amount you’ve borrowed will roll up over time. This only has to be paid back when the property is sold, either when you pass away or move into permanent long-term care. If you’ve taken out an equity release product as a couple, it will continue for as long as one of you remains in your home.
Equity release myth three: I’ll no longer own my property
Equity release doesn’t mean selling your home to the lender: you are simply borrowing against it, and you remain the owner. Unlike a conventional mortgage, a lifetime mortgage has no fixed end date, so the mortgage lasts for as long as you need it to. As many lenders restrict mortgage options for those in their 60s, this can be invaluable for older homeowners.
Equity release myth four: I can’t release equity from my home because I’ve still got a mortgage on it
Steve Wilkie, managing director of equity release specialist Responsible Equity Release, said:
“With a lifetime mortgage, the customer receives cash in exchange for a first charge on their property to the equivalent amount. This can then be used to repay the existing mortgage, all in the same legal transaction. They’ve now got a lifetime term, and no worries over repayment. Customers who want to make regular monthly interest payments can choose a suitable plan and set up a direct debit. If they can’t afford to pay anymore, or miss three payments, the mortgage doesn’t default – it automatically switches to rolled-up interest.”
Equity release myth five: There won’t be anything left to leave my loved ones
Lifetime mortgages have become increasingly flexible in recent years, and there are now plenty of plans available which allow you to protect a portion of your equity for inheritance.
If you don’t want your loved ones to have to wait until you die before receiving financial support from you, you could use equity release to provide them with an early inheritance. Bear in mind, however, that using a portion of your equity now means there will be less available to you later, and may reduce the value of your estate.
According to the figures from the Office for National Statistics, financial gifts and loans are most commonly received by younger people, particularly those aged between 25 and 44. More than one in 10 people in this age group has received a gift or loan of more than £500 in the last two years.
“It’s no surprise that younger people are the most likely to receive a gift or loan from a family member,” said Mr Wilkie.
“Their grandparents were the generation who were told they ‘never had it so good’, and they want the same things for their children and grandchildren. This desire partly explains why there has been such a large rise in equity release this year. Homeowners released over £11m from their homes every day in the third quarter of 2019, and a large chunk of this will have been to help younger family members buy property, or to contribute towards school fees and living expenses."
To see how much equity you could release from your property, try our free equity release calculator now
Please remember that if you are in receipt of means-tested benefits, releasing equity may affect your entitlement. Fortunately, there are a range of plans available to help you manage the impact of a lifetime mortgage. Seek professional advice on the best option to suit your needs and ask your adviser for a personalised illustration to ensure you understand all the features and risks.
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,490.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group. For more information on Telegraph Financial Solutions, click here.
Information correct at date of publication.