With fitness becoming a trendy activity worldwide, people are today living longer, enjoying longer retirements. However, due to prolonged life, and the harsh economic climate, almost 60% of the population in retirement is now looking for ways to maintain their lifestyle.
Yes, pension pots and capital investments are one of the most sorted out ways to ensure your sunset years are smooth sailing, but with the invention of equity release1, you can now even get to take a world tour after retirement.
So, let’s take a closer look at what is equity release at it’s core? Equity release is a home mortgage that allows proprietors aged 55 and above to untie the value in their property by turning it into a capital lump sum or regular income. One of the most popular equity release schemes is the lifetime mortgage that offers you the right to retain ownership, right to reside in your home until the loan comes to an end, and tax-free cash that you don’t have to repay monthly.
However, even if the equity release market provides you with great flexibility, a myriad of options and increasingly competitive rates, there are still myths surrounding this Hermes of financial products. Well, here’s a comprehensive guide to bust equity release myths and help you understand how equity release can help you increase your finances in retirement.
Are You Considering Equity Release?
Historical Interest Rates
According to the Equity Release Council, equity release rates hit an all-time low in 2021! There are so many equity products on the market, and more than 50% of them are now offering rates lower than 4%! Some even as low as 2.3%. Even though 2021 has seen a slight increase since then, it remains average low compared to previous years, where it was around 6%.
Thanks to the beautiful ERC (Equity Release Council), you can now have an informative report to help you decide whether you should consider an equity release or not. According to their Autumn Market Report, 50% of equity release products offer rates lower than 4%! 20% of equity release products offer rates lower than 3%, some even as low as 2.6%!
Best of all…
Equity release has the lowest interest rates of any personal forms of borrowing money, including mortgages, personal loans, credit cards and even overdrafts.
July of 2019 saw a 29% increase in equity release product sales, making it a rise of 88% during the first 6 months of 2019. Even though those numbers decreased slightly by mid-2020, the rates remained low after the 5% sales decline due to the pandemic.
But, listen to this:
It didn’t use to be this way. History tells a much more glum story.
In the past, interest rates used to be atrocious! Let’s look at the figurese1:
Now, seeing as the rates have been steadily dropping, the last couple of years has seen the lowest rates yet! Interest rates kept falling from 2016 and are now at an all-time low. Some equity release providers are even going as low as 2.25%!
Favourable pricing saw the average equity release interest rate fall to 4.01% midway through Q4
2020, with the lowest rates at 2.30%¹ – less than the average 10 year fixed rate mortgage.
Why Does Equity Release Have a Bad Reputation?
In the late 1980s – early 1990s, equity release schemes had a bad name. This was due to increased corrupt industry practices. Several deceitful lenders undertook expensive deals that caused homeowners (and their properties) to owe them more than their homes’ value.
However, you shouldn’t worry!
Luckily, in recent years, many rules and regulations are keeping you and your finances safe. You don’t have to worry about a thing! These corrupt actions of the lenders caused uncertainty regarding equity release. People weren’t so keen on it anymore. On the other hand, this resulted in something positive as well. Industry regulations became more strict.
The Financial Conduct Authority (FCA) helped improve equity release processes due to their regulations and customer protection policies. Equity release is now so much safer than back then. Today, it’s an excellent way for someone who is aged 55 or older needs extra cash quickly.
Equity release schemes or plans are monitored and controlled by the Financial Conduct Authority (FCA). Most providers out there are also members of the ERC (Equity Release Council), a trade body with high standards and the best customs and procedures for equity release companies and financial advisors.
To make sure you’re choosing the right plan, the council states that:
- Rates need to be fixed, and if not, the provider must have a maximum limit for the loan’s lifespan.
- You are allowed to live on your property your whole life or until you need long-term care. You simply need to abide by the rules of your equity release plan.
- You can move house, as long as your lender has approved the new property and that it offers the same amount of security for your equity plan.
- Lifetime mortgage plans need a ‘no-negative-equity guarantee’. This means that when your property gets sold, and you get less than your loan, you won’t have to pay in the balance. Please also take solicitors charges and agents fees into account.
- The Equity Release Council safeguards you with their strict help on the sales process. They also allow you to take out an equity release plan if you have adequate financial support or advice from independent money advice services.
Clearly, and thankfully, a lot has changed! The interest rates are so reasonable in recent years that it’s such a great way to loan money! Many rules and regulations are keeping you and your finances safe. So you don’t have to worry about a thing!
Best of all:
Equity release interest rates have been steadily dropping, the last couple of years has seen the lowest rates yet! Interest rates kept falling from 2016 and are now at an all-time low. Some equity release providers are even going as low as 2.25%! It’s definitely the top and best way to borrow money in modern times.
Separating Equity Release Old Wives’ Tales & Facts
As a homeowner aged 55 and above, living within the remits of the UK and owning an estate worth more than €70,000, taking equity release is one of the smartest financial decisions you can make. However, when you don’t understand how does equity release work and what it entails, you might find yourself in a corner confused and overwhelmed with all the information you get.
Well, this guide will help put the record straight and separate the reality from the fallacy. With that, here are of the equity release misconceptions:
One Has to Make Monthly Repayments with Lifetime Mortgage Schemes
It’s one of the most common equity release myths, and sadly, most homeowners tend to steer way from equity release in the belief that they’ll have to repay it during their lifetime. Well, that’s fiction. Unlike standard mortgages, there are no monthly reimbursements with lifetime mortgages. One reimburses the mortgage when you pass away or move out permanently.
However, if you choose to pay any monthly payments, there are lifetime mortgage options that you can take like the interest-only mortgage or voluntary repayment plan. These schemes enable you to make optional, penalty-free repayments thus allowing you to maintain a level balance.
You’ll End Up Paying More Than the Worth of Your Residence
Equity release schemes are currently under heavy regulation terms with the Financial Conduct Authority2 (FCA), in a bid to safeguard consumer interests. Many plan providers are also certified members of the Equity Release Council3 (ERC), thus making equity release one of the most secure mortgage loans.
Think about it:
If your equity release provider is part of the ERC, then that means that the equity release scheme you choose will offer you the ‘No Negative Equity Guarantee4.’ The policy ensures that when the estate market value plummets and the sale of your home isn’t enough to repay your mortgage, neither you nor your heirs will be forced to pay more.
It means that any mortgage scheme from a regulated equity release company will offer a client the no-negative-equity guarantee. If your residence decreases in value and the sale of the estate isn’t adequate to settle the remaining debt, neither you nor your beneficiaries will be liable to pay more. As long as you meet the set terms and conditions of the scheme you’re purchasing, and the residence is sold for a reasonably obtainable price, you won’t reimburse more than the value of your house when the provider sells it – even if it’s less than the amount owed.
There Won’t Be Any Inheritance Left for Your Heirs
Equity release plans sound like you’re giving away your family inheritance to mortgage firms, but that’s not entirely true. With the FCA at the realm of managing these mortgage products, today, there are several equity release schemes available that allow one to safeguard a percentage of their equity for inheritance.
If you don’t want your loved ones to wait till you pass on before getting any financial assistance from you, you can use equity release funds to offer them an early inheritance. You should, however, remember, that using a percentage of your capital now means that you’ll have less available to you later on and can reduce the value of your residence.
As per the figures from the Office of National Statistics, financial gifts and mortgages are popularly received by young people, particularly those aged between 23 and 45, and more than two in ten people in this age group have received a gift of more than €300 in the last two years5.
One Can’t Release the Equity Release Mortgage If They Have An Existing Mortgage on Their Estate
Equity release might seem like a ‘too good to be true’ deal, and sometimes you get tangled up in the equity release fallacies especially when it comes to taking out the mortgage plan when you already have an existing mortgage.
Well, this is why equity release schemes are perfect. The mortgage schemes allow homeowners to unlock the equity tied up in their homes and if you already have a mortgage on your house, you can use the funds released to clear off the mortgage first.
What happens is that when you take out the lifetime mortgage, you’ll receive capital which you can then use to repay the current mortgage, all in the same legal transaction.
It’s Not Regulated
Well, some time back, there were issues and financial disputes due to unscrupulous lenders flooding the equity release market. The government was dealing with too much, and thus the Financial Conduct Authority was mandated with regulating equity release schemes.
Moreover, the Equity Release Council was also established in 1991, and the trade body was charged with the responsibility of governing equity release products. They have a statement of principles that equity release providers should heed to protect consumer interests. One of these codes and regulations is that you have to get financial advice before taking out the mortgage. The excellent advice from an independent source will help you navigate the equity release market and help you pick out the mortgage scheme that’s perfect for you.
Therefore, don’t worry about regulations since these two organizations have your back and protect you from the equity release companies to avoid.
You Have to Pay Tax on the Amount Released
Research shows that 55% of homeowners using equity release don’t realize that the cash lump sum they release from their estate is tax-free. Most actually belief some tax implications are imposed when taking out the home reversion scheme or lifetime mortgage plan.
Well, that’s another equity release cock and bull story since when you take out cash against the value tied up in your house, it’s not categorized as income, meaning you won’t have to pay any income tax. However, it’s best to keep in mind that in as much as you won’t pay taxes, taking out the equity release mortgage can affect your entitlement to state benefits.
You Can Lose Your Estate and Be Forced to Move Out
By choosing the lifetime mortgage, you retain ownership of your estate. However, when you opt for the home reversion plan, you trade a part of your entire in exchange for a capital lump sum. So, you lose ownership of the percentage of the estate that you sell to the plan provider. Nonetheless, you still get to reside there rent-free until your estate is sold when you pass on or move into residential care.
Moreover, suppose you want to ensure that you leave a legacy for your family. In that case, you can ring-fence some of the value of your residence as a legacy –ensure that you inform your financial advisor when you meet them for the first meeting.
You Can’t Move Home Again with Equity Release
Well, you might think that since you have to take out equity released based the value of your primary residence, you won’t be allowed to move into another home. However, that’s another equity release fallacy. Provided that your estate meets the required criteria of your lender, you might be able to move and transfer your mortgage plan into another property.
You won’t incur any penalties, although there are certain expenses involved with transferring your equity release plan to another estate. That’s why it’s always ideal to discuss the prospects of moving into another residence with your lender before you set the mortgage scheme’s wheels in motion.
Equity Release Can Cost You an Arm & a Leg
Some say that taking equity release will cost you so much that the cash you release won’t make up for the expenses incurred. Well, that’s a lie. Using lifetime mortgages to take out the lump sum or a monthly income will subject you to interests that’ll be included in the final amount. It means that you won’t have to pay off any of the interest rates over your lifetime, and instead, the plan provider will get their mortgage back when the last homeowner passes away or moves into residential care.
As a result of the compounded interest, the amount you owe will increase with time, meaning that it could be costly. However, if you want to manage this balance, there are equity release options that allow you to pay a percentage of the interest monthly. That means that the interest rates on equity release won’t roll over time and the initial amount will remain constant, provided that you make the regular interest payments.
As with any other mortgage scheme, you must ensure a lifetime mortgage plan is ideal for you before proceeding.
One Has to Take All the Capital at Once with Equity Release Schemes
Most homeowners think that when you take an equity release scheme, you’ll receive a capital lump sum. However, there are other mortgage schemes like the drawdown lifetime mortgage that enables you to take your cash in ‘drawdowns’- monthly income. You’ll receive an initial payout then the lender will place the remaining balance in a cash reserve facility.
Taking the resources in small sums instead of in one lump sum will help you reduce the amount of unpaid interest that’ll be added to your mortgage every month. You’ll incur a different interest rate – one that’s not too hefty.
There’s also the income lifetime mortgage scheme that offers homeowners aged 55 and above a secure income over a chosen term.
Frequently Asked Questions
Equity release schemes are the most secure financial products are they’re regulated by the FCA and are under the governance of the ERC. With the lifetime mortgage plan, you get to retain ownership of your home and continue residing there until you pass on or move into a retirement home.
Moreover, with the ‘negative equity guarantee ‘policy, you’ll never owe more than the value of your estate even if the estate values fall and the cash from your home’s sale isn’t enough to cater to the loan amount.
Well, you’re not committed to taking out the equity release scheme until it’s ending.
However, if you decide to repay the mortgage before the last homeowner dies or goes into long-term care, then you’ll incur early repayment charges, which can be costly.
No, you won’t. Since equity release providers are bound by the ‘no negative equity guarantee ‘scheme that’s put in place by the ERC, homeowners can’t pay more than the initial value of their home when the plan comes to an end.
That means that the lender will write off the balance when your estate is sold for less than the initial loan amount – your heirs won’t be left with any interest to pay off.
More than 500 homeowners believe that when they take out the equity release, they’ll be stuck in that home forever. However, provided that the new estate meets the criteria of the equity release lender, there’ll be no reason to prevent you from moving and taking your mortgage scheme with you.
Of course, there’ll be costs associated with transferring the loan plan to another home. Still, the lender and your advisor will inform you about the repercussions before taking out the equity release plan.
How wonderful! All the misconceptions that you might’ve had in the past are busted! Now, you can go on with the peace of mind you deserve and take out an equity release plan that suits your every need.
For more information, feel free to contact us. We’re here to help.