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Debunking equity release myths and answering your concerns

It’s safe to say that equity release has a bit of a chequered history and has been given a bad name in the past, making many people think that it’s something to avoid.   

Canada Life, an equity release lender, said that according to a survey 77% of people have a negative view on this type of borrowing due to hearing horror stories.

However, the equity release market has evolved massively over the last few years and now there are hundreds of different (perfectly safe) products on the market, all varying in flexibility and cost.

The benefits of equity release can now massively outweigh the pitfalls.

A brief history of equity release

The first cash home reversion plan was introduced in 1978 and in the late 1980s a number of mortgage-based schemes were introduced where the capital was used to purchase an investment bond. The bond was then used to pay the monthly interest on the loan and provide an income.

The theory was that investment returns on the bond would be sufficient to cover the required interest payments and an income, however, in the early 1990s several issues started to arise.

These include:

In most cases, a variable interest rate was charged on the mortgage and by the mid-1990s the standard mortgage rate reached 15.4%. For those who were making monthly interest payment, the rise in interest rates meant that the income did not cover the repayments.  
Investment returns fell dramatically and many customers saw the value of their bonds fall below their initial investment amount. Customers still had to withdraw money each month to pay off the mortgage and those on an interest roll-up scheme had to stop taking an income from the plan altogether.
House prices fell which meant that those with interest roll-up schemes saw their debt rise very quickly. What may have started off as a 25% loan on a house valued at £100,000 could rapidly become a 40% loan on a house now valued at £90,000.

In the end, most customers were compensated but the whole scheme left many confused as there were also a number of perfectly safe products on the market at the same time. This is where a lot of bad press and then apprehension around equity release began. 

Below are a few examples of the concerns that some people have towards equity release and our answers to explain why they should be a thing of the past.

Will my home be owned by someone else?

Canada life said that 48% of people surveyed were concerned that their home would be owned by someone else.

At one point in time, home reversion plans were the only product on offer and these plans involve selling all, or a proportion, of your property to the lender.

If you sell them the whole value of the property, not only will you no longer own the property, but when the property is sold, the lender will take all the profits leaving you with nothing to leave to your beneficiaries.

However, a huge majority of the market is now based on a different model, known as a lifetime mortgage.

With a lifetime mortgage plan, your home will not be owned by someone else. The plan involves securing the loan against your property – not giving up ownership. Even if you borrow an amount that is equal to the total value of the property, you will still own it in full and it will remain fully in your name.

With a home reversion plan, however, you will be transferring the ownership to the provider, in the percentages agreed upon. If you only borrow an amount that is equal to 50% of the value, you will only be transferring 50% on the ownership. The provider will only fully own the property if you borrow an amount that is equal to 100% of the value.  

However, with both plans, you will retain the right to stay living in the property for the rest of your life due to a ‘lifetime tenancy agreement’ that is made for you in return.

It is important to also say that home reversion plans aren’t all negative as it depends what is right for you and your circumstances. But, if home ownership is important to you, a lifetime mortgage is likely to be the more suitable option.

Will I end up owing more than my property is worth?

37% of people surveyed were concerned about negative equity.

When you take out an equity release plan from a lender who is a member of the Equity Release Council, you will never have to pay back more than what your property is worth when it is sold, regardless of how much is outstanding on the loan when you pass away.

This is due to a ‘no negative equity guarantee’ which all members of the ERC have to provide.

This guarantee means that you will never owe more than the value of your property, even in the unlikely event that your property decreases in value and isn’t enough to clear the debt. Any outstanding debt will be written off and neither you, your beneficiaries or your estate will be liable for it.

Will I be able to leave an inheritance?

46% of people surveyed were worried about not leaving an inheritance. However if you release equity in your property, you can still leave your beneficiaries an inheritance.

Firstly, you can use the money released to give your family an early inheritance. Not only may it be more beneficial for your children/grandchildren to have the money earlier in life anyway, it could also help to reduce the inheritance tax that they will have to pay when you pass away.

Secondly, if you borrow an amount that is less than the value of the property and goes up in value during the time you have the loan, you or you beneficiaries will still benefit from the profits. The lender will only take what they are owed from the proceeds, any extra will be put back into the estate and distributed accordingly.

Lastly, some plans will offer you an ‘inheritance protection guarantee’. This will allow you to protect a certain percentage of the property’s future value which will be given to your beneficiaries when you pass away, regardless of how much is outstanding on the loan.

Will I be able to move to a new house?

As equity release is considered a ‘lifetime’ loan, a lot of people believe that you won’t be able to move to a new house once the loan has been taken out.

Equity release plans are actually transferable from one property to another. The new property will need to meet the lender’s criteria however, so this is something worth discussing before setting up the plan if you think that moving to a new house in the future is likely.

There are also features that apply to some products, such as fixed early repayment charges, so in the event that the mortgage wasn’t transferable, the customer would know upfront what the charges would be to repay the borrowing early.

Will I have to make expensive monthly repayments?

54% of people surveyed thought that equity release is expensive. Equity release products certainly were expensive in the past, however the average interest rate is around the 4% mark.

In addition, most plans don’t require you to make any monthly repayments at all! The interest is simply added to the capital and both are paid back together from the proceeds of the property when it is sold after you pass away or move into a permanent residence of care.

However, you can choose to take out a plan where you can make repayments to prevent the debt from increasing due to the compounding effect of interest. These repayments can be interest-only, voluntary or optional.

Will I be able to set up an equity release plan if I have an outstanding mortgage?

You can set up an equity release facility if you have an outstanding mortgage on your property, as long as you can pay off the mortgage using the money released, or by other means.