Common Equity Release Myths That Need Addressing

There are many common equity release myths that need addressing, and that’s what we’re going to do today.

First, we want to talk about the reasons behind these myths, which we predict have a lot to do with fear surrounding equity release.

Equity release is a new scheme compared to the traditional mortgage, so it makes sense that people would be wary of it and would potentially believe some of the myths that circulate.

People would rather stick with a comfortable traditional mortgage than push the boat out with equity release.

Another reason for a large number of myths about releasing equity is that the media can paint this scheme in a bad light and emphasise its risks, rather than boasting about its many great features.

If homeowners do not take the time to investigate equity release themselves, they may adopt the media’s negative view of it.

Finally, some equity schemes really are dangerous, which brings down the reputation of equity release in general.

For instance, some equity release advisers are not regulated by the Financial Conduct Authority or the Equity Release Council, so they are free to manipulate their clients.

Common Equity Release Myths That Need Addressing – Why is it Important to Investigate the Reality of Equity Release?

We do not have a problem with homeowners researching equity release and deciding it isn’t right for them. This is why we talk through the pros and cons of equity release with our customers, rather than shying away from the obvious risks.

However, what we do not appreciate is homeowners ruling out equity release without investigating it for themselves.

Independent research is so important as everyone has a different experience with equity release, and we would hate for you to miss out because someone else didn’t have the best time with it.

Today, we want to talk you through 15 common myths surrounding equity release. For some of them, we will explain where the myth comes from, as we know that there is some truth to every stereotype.

However, we will then go on to give a realistic picture of equity release that does not solely focus on the disadvantages.

Myth 1: Equity Release is Only For People in Retirement

This myth comes from the fact that many people take out equity just before they retire, or during their retirement, often with a retirement mortgage or a retirement interest-only mortgage.

They do this because they need an additional income in retirement as well as their pension and any means-tested state benefits they may be claiming.

However, you are certainly entitled to release equity from your property if you are not yet retired. The only requirements are that you must be at least 55 years old, you must be a homeowner, and your property must be worth £70,000 or more. Retirement does not factor into the eligibility criteria.

Please remember that if you are taking out a joint loan, both homeowners must be at least 55 years old, otherwise you may have to consider taking out a loan independently or waiting until you and your partner turn 55 years old (or 65 for a home reversion).

Myth 2: Equity Release Loans are Taxed

Some people assume that equity release loans are taxed as they perceive this type of loan as an income. However, loans are treated differently to official forms of income, so they are not liable for tax.

This means your equity loan will be completely tax-free, regardless of whether you receive it as a once-off lump sum or in regular instalments.

Myth 3: You Cannot Leave an Inheritance If You Release Equity

As releasing equity can reduce the amount of funds you have leftover after you pass away, some people assume it prevents you from leaving an inheritance completely, and this causes them to refrain from releasing equity (1).

However, you can still leave money to your family and friends by requesting inheritance protection when you get involved with a plan. What’s more, you could give money to your loved ones while you are still alive, and this would be tax-free for seven years.

Any inheritance you do leave will not be liable for inheritance tax as equity release funds never are.

Myth 4: You Cannot Own Your Home If You Take Out Equity

As you must give up your rights to your home with a home reversion, some people assume this applies across the board with equity release, but they would be incorrect.

If you take out a lifetime mortgage, you will still be the homeowner of your property, and you will be expected to live there on a permanent basis.

As for having tenants, this may be allowed with certain schemes and lenders, but it tends to be frowned upon.

Myth 5: You Will End Up Owing More Than What You Borrowed

It has been known for equity release customers to owe back more than the initial borrowed amount at the end of the scheme, which leaves family members in an unfortunate position as they must find a way to pay back the remainder of the loan.

Yet, with a no negative equity guarantee, which is a fundamental part of most contemporary equity release plans, this will never happen. No matter how much your property may drop in value, you will never owe more than what you first borrowed.

Myth 6: No One Releases Much Money With Equity Release

This myth is completely false. Homeowners all over the world have benefitted from equity release in significant ways, releasing large amounts of money for home improvements, holidays, and everyday expenses.

Some people even release money to purchase a new property that is well-suited to their retirement lifestyle, such as moving to an area that is near to friends and family (2).

It is possible that you will only be offered a small loan, but we cannot possibly say whether this is true until we find out about your personal details including your financial history and the details of your property.

However, if everyone was receiving small loans, nobody would use equity release products, and they are clearly becoming more and more popular each year.

Myth 7: You Should Not Include Your Family in Your Decision

Some people are worried about including their family in the equity release process as they feel guilty that they are leaving them with less money. However, we strongly recommend involving your loved ones as they can offer helpful advice that you may have not considered.

We also recommend implementing a power of attorney, or finding a plan that does this for you, in case you ever reach a point where it becomes difficult to make decisions for yourself.

Asking a family member to be your donor could be a huge weight off your shoulders, as they will be able to step in if you ever need them to.

Myth 8: You Must Use an Equity Loan For a Specific Purpose

The truth is that equity loans can be used for anything you like, even if it’s a trivial purchase that people may criticise you for. We don’t recommend this, of course, but no one is going to stop you from spending your loan on whatever you want.

If you happen to want to buy a new property with your loan, then there are plans that are designed with this specific purpose in mind. The main ones are buy-to-let schemes (for rental properties) and second home schemes.

Myth 9: You Cannot Repay an Equity Release Loan

The general rule that you may know is that equity release loans cannot and should not be repaid by equity release consumers. Consumers are expected to stick with the plan for the rest of their life, and to not step in when the interest is accruing on the loan.

This is why some plans have repayment penalty fees of up to 25% of the initial borrowed amount (3).

However, it is certainly possible to repay an equity release loan on some plans. The voluntary repayment plan is set up so you can make penalty-free repayments whenever you see fit, which could follow no pattern, or could be on a regular basis i.e. monthly ongoing repayment commitments.

There is also an interest-only scheme. With interest-only payments, you pay back some of the interest on a regular basis and stop it from adding up over time. This is better for people who can commit to making repayments, i.e. you trust that you are earning enough income to do this.

Myth 10: You Must Have Paid Off Your Mortgage to be Considered For Equity Release

It is true that you cannot enter equity release with an outstanding mortgage, as you must transfer the mortgage over. However, you can begin the process with an existing mortgage, provided that you know how you are going to pay it off.

Some people pay it off using their equity loan, and others find a way to do it themselves e.g. savings, borrowing from loved ones, or credit cards.

However, we would recommend the first way as you are already going to be receiving the loan so it makes sense to use this rather than owing money to another individual or organisation.

Myth 11: When One Person Passes Away, Their Partner Must Vacate the Home

This myth scares some people away as they do not want to end up in such a stressful situation right after their partner has passed away. Rest assured that this will never happen to you, as equity release schemes are designed to last until the last person has passed away.

Myth 12: You Cannot Move Home With Equity Release

It is often difficult to move home with equity release as you have to find a property that is approved by your lender, which may not be your first choice. However, it is usually possible to move home.

To guarantee this, make sure your lender is regulated by the Equity Release Council, as this means they are obligated to provide you with a ‘suitable alternative property’ at your request.

If you move to a lower-value home, you may face penalties as it is less desirable for the provider, but it can still be possible. As for a higher-value home, you may benefit from a higher loan if you take this route.

Myth 13: Interest Rates are Always High On Equity Release Plans

The interest rates are different for each equity release scheme, so it is not true to say that the average interest rate for equity release is high. Some plans are notorious for low-interest rates, such as the voluntary repayment plan and the interest-only plan.

If you have a disability, you could be eligible for the enhanced/ill-health plan, and though this scheme tends to have high-interest rates, you can be offered lower interest rates if you are in poor health.

Myth 14: Once You Have Made an Application, You Cannot Back Out

This couldn’t be further from the truth. People may assume this as it is known that equity release is hard to get out of. However, this is only the case once you have received your loan and you have fully committed to the scheme.

When you are making an application, you are permitted to withdraw it whenever you want to. You can even alter it to apply to a different plan or lender.

There is no obligation to stick with your original plan until you have signed off on equity release.

Myth 15: When You Pass Away, Your Family Will Have to Pay Off Your Debts

The whole point of releasing equity is that you do not have to worry about repaying the loan, so the same is true for your family.

The loan will be paid back using the proceeds of your property sale, and this includes all interest that has accrued, as well as compound interest.

If you have a no negative equity guarantee in place, your family will certainly not owe anything, as the lender cannot ask them for any money beyond what you borrowed in the first place.

The same applies if you have moved into long-term care, as the equity release scheme will be declared complete and your home will be sold.

Myth 16: Equity Release is a Last Resort Option For Homeowners

Though equity release is risky in some ways, it offers a whole host of benefits for homeowners.

You receive a tax-free loan that does not have to be repaid until you pass away, you can spend the loan on whatever you would like, and you can benefit from lower interest rates than most loans offer. For these reasons, equity release is not a last-resort option.

What’s more, the many alternatives to equity release have their own flaws.

To name a few, downsizing is stressful and complicated, credit cards are risky, and traditional loans put pressure on the borrower to pay back money that they may not be able to afford, which can perpetuate a cycle of debt.

As you can see, however you go about boosting your income in retirement, you will be taking a risk, so why not take that risk with equity release?

Need our help?

If you would like to learn more about the reality of releasing equity rather than the misinformation that plagues the media, do not hesitate to get in touch with us on 0330 058 1579.

To find out how much you could release from your property, ask for a personal quote or use our equity release calculator.

If you aren’t ready to contact us yet, explore our website, where you will find more realistic information about equity release.

We have a list of different types of equity release plans you could have to demonstrate the diversity of equity release.

We also have a help centre where we answer some of your most frequently asked questions about equity release. Finally, our blog contains informative articles about some complicated parts of equity release, including legal issues and terminology.

References

[1] What is equity release? https://www.which.co.uk/money/pensions-and-retirement/youre-retired-working-on-benefits-equity-release/equity-release/what-is-equity-release-a5jqy4d36xlv

[2] We need £100,000 to move closer to one of our children. Should we use equity release? https://www.theguardian.com/money/2022/jun/13/we-need-100000-to-move-closer-to-one-of-our-children-should-we-use-equity-release

[3] Equity release: what are the risks? https://www.thetimes.co.uk/money-mentor/article/equity-release/