Equity Release Myths in 2022
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With health and fitness becoming a worldwide trend, people live longer and have more time to enjoy retirement.
Or do they?
In this harsh economic climate, almost 60% of retirees are now looking for ways to maintain their lifestyles, and many see no way of ever having the means to retire.
What You’ll Learn in This Article:
We’ve done a detailed analysis of equity release then and now, looked at all the history, and studied more than 220 regulated plans.
Behold, a comprehensive guide to busting equity release myths in Aug 2022. Discover these now!
Before continuing, check out this quick video that summarises the most important information about equity release:
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What’s Equity Release?
Why Equity Release Has a Bad Reputation
Before we get into the 7 myths, it’s vital to unpack why equity release has a bad reputation in the first place.
Let’s be clear; the industry wasn’t always what it is today.
Before 1991, equity release was not a healthy option for retirees.
The plans available back then often left homeowners with massive debt, with some even losing their homes altogether.
In addition, there were a lot of scam artists posing as equity release lenders.
Don’t be put off!
The 2022 equity release industry is nothing like it was back then. It’s fully regulated and designed to protect the interest of the consumer.
The Equity Release Council was established in 1991, and the industry now follows a strict code of conduct.
What’s more, the competition is heating up with massive industry growth. Lenders need to offer fantastic deals to stay in the game.
Historical Interest Rates
In the past, interest rates for equity release plans were exorbitant, sometimes around 7% or more.
These days, equity release mortgage interest rates are extremely low. Some are even competitive in comparison to regular mortgage rates.
Annual interest can be available from as low as 4% to 7%.
View the most current rates here.
Now, let’s debunk some myths!
7 Myths of Equity Release
Here are 7 essential equity release myths that will change the way you see these products.
Myth 1: I Will No Longer Own My Property if I Take Out an Equity Release Mortgage
This is not true!
There are 2 main types of equity release products on the market: a lifetime mortgage and a home reversion scheme.
With a lifetime mortgage, you will retain 100% ownership of your property.
With a home reversion scheme, you only need to sell off parts of your property, still retaining part-ownership.
Myth 2: To Qualify for an Equity Release Mortgage, I Must Own My Property Outright
Once again, myth busted.
While you can’t have a massive mortgage, you can have some outstanding mortgage payments and still get an equity release.
When releasing the funds, you will first pay off your current mortgage and then keep the income balance.
Your financial adviser will confirm if the amount in your outstanding mortgage is sufficient to qualify for an equity release mortgage.
Myth 3: I Could Wind Up Owing More Than the Value of My Home
The great thing is that this isn’t possible!
Even if you live long, and your rolling interest accumulates, your family will be protected by a ‘no negative equity guarantee‘ when you pass on or move into a care home.
This refers to legislation set out by the Equity Release Council.
That states that you can never pay more for your equity release than the value of your property when it is sold, even if property prices plummet.
In addition, interest rates are at an all-time low, meaning that you will pay a lot less compound interest¹ on your equity release plan.
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Myth 4: I Have No Choice Except to Take Equity Release in One Lump Sum
Yet another myth to bust!
Equity released from your home is conveniently available in one lump sum, smaller lump sums through a drawdown facility, or as a monthly salary.
You can also discuss a combination of these with your financial adviser².
Myth 5: I Won’t Be Able to Leave Anything to My Loved Ones if I Take Out a Lifetime Mortgage
In some cases, the entire amount recouped from the sale of your home will be used to pay back your equity release plan, but there is the option of inheritance protection.
The Equity Release Council³ has arranged for those taking out a lifetime mortgage to be able to put aside a percentage of their estate for an inheritance.
This ensures that your family members are left some money on your passing.
In addition, you can take out a lifetime mortgage to give your family an early inheritance.
Myth 6: Any Money I Receive From Equity Release Will Be Subject to Taxation
Equity release is the perfect way to unlock tax-free income.
Research shows that 55% of homeowners using equity release don’t realise that the cash lump sum they release from their estate is tax-free.
Most actually believe some tax implications are imposed when taking out the home reversion scheme or lifetime mortgage plan.
When you take out cash against the value tied up in your house, it’s not categorised as income, meaning you won’t have to pay any income tax.
Keep in mind that taking out the equity release mortgage may, however, affect your entitlement to state benefits.
Myth 7: With an Equity Release Mortgage, I’ll Still Have to Make Monthly Payments
You don’t have to!
While you can make monthly payments if you wish, the great thing about equity release is that you are by no means obligated to do so in your lifetime.
All income loaned, plus rolling interest, will be paid back upon your death or when you move into a permanent care facility.
Can You Get Out of Equity Release?
You can get out of equity release. However, you would likely have to cover early repayment charges.
Could You End up Paying More Than Your Home's Worth With Equity Release?
You can’t end up paying more than your home’s worth with equity release. A ‘no negative equity guarantee’ is set out by the Equity Release Council. This ensures that your family will never owe more than the sale value of your property, even if prices plummet.
Is It True That You Can't Move House Again with Equity Release?
It’s not true that you can’t move home with equity release. However, your new home will need to meet your lender’s criteria.
Does Equity Release Affect Your Pension?
Equity release can affect your pension. You’ll need to inquire about this with your plan provider.
Is It True That Equity Release Is Only for People With Large Properties?
It’s not true that equity release is only for people with large properties. However, your property value must be at least £70,000 for you to qualify.
Equity release is becoming a widely accepted method to enjoy a stress-free retirement.
By unlocking the cash tied up in your home, you can unleash a tax-free income to help you and your family live comfortably.
While many of the above myths were once true, equity release is a continuously growing and developing market.
This growth comes with a regulatory body and exceptional customer protection.
You might want to check out the equity release pitfalls to be aware of and be mindful of common equity release myths to help guide your decision.
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