Busting equity release myths
When it comes to equity release, there are a lot of myths.
The ability to borrow money for life, against the value of your property, is an option for some people in retirement.
You might need the money to top-up your pension income, cover the cost of home improvements, or make a financial gift to family members.
It’s no surprise that equity release comes with a whole host of misconceptions and myths; it’s a reasonably complicated financial product, after all!
In a new blog post, SunLife’s equity release director Simon Stanney has tackled seven of the biggest myths surrounding equity release.
The first myth Stanney tackles is that equity release is unregulated.
Equity release was unregulated in the past, but it’s not anymore. These days, all equity release providers and financial advisers are regulated by the Financial Conduct Authority (FCA).
There’s another layer of consumer protection too, in the form of the Equity Release Council, a trade body representing the equity release sector.
The Equity Release Council ensures that all members follow their Statement of Principles, including a ‘no negative equity’ guarantee, which means you never pay back more than the value of your home.
Another principle they police is ‘security of tenure’, guaranteeing you can stay in your home for the rest of your life.
The second myth is that you can’t use equity release because you still have a mortgage.
According to SunLife, one of the top five reasons why people use equity release is to pay off an existing mortgage.
Their research found that 65% of over 55s wrongly believed that having a mortgage means you can’t use equity release.
If you have a mortgage and take out equity release, you need to release enough money to clear the existing mortgage or any other debt that is secured on your property. Once those debts are cleared, the balance of the equity release can be spent as you please.
The third equity release myth is that you can’t leave behind an inheritance.
SunLife’s research found that a quarter of over 55s thought taking out equity release meant they could not leave behind an inheritance.
While using equity release means you cannot leave behind the value of your house for your loved ones, they can still inherit any remaining monies after the equity release loan is paid off.
If you want to use equity release and guarantee an inheritance for your family, you can ringfence some of the value of your home to leave behind.
Equity release myth number four is that using equity release will leave your family in debt.
FCA regulation and the Equity Release Council principles mean that any equity release plan carries the ‘no negative equity’ guarantee, so you cannot leave your family with your debt.
Even though the amount of equity released, plus interest added, will be a debt against your home, the amount charged by the equity release provider will never exceed the value of the property. This means the equity release debt will always be covered by the sale of your home, either when you die or should you move into a residential care home.
The fifth myth is that you could lose your home or be forced to move out.
Once again, this is where the Equity Release Council principles come into play, with the ‘security of tenure’ guarantee.
When you use a lifetime mortgage, you remain the legal owner of your home.
With home reversion plans, you sell part or all of your home in exchange for a cash lump sum, but continue to live there, rent-free, until the house is sold, you die, or move into residential care.
Myth number six about equity release is that you can never move home again.
More than half of homeowners over 55 believe that if they take equity from their home, they will be stuck in that property forever.
However, assuming you meet the criteria of the equity release provider, you can move home and take the equity release plan with you.
There will, of course, be some costs associated with moving home with the plan. But all costs will be fully explained before you take out the equity release plan.
Myth number seven, the final equity release myth, is that the cash from equity release is taxable.
SunLife’s research found that 55% of over 55s didn’t realise that the cash from equity release is tax-free.
There’s no income tax or capital gains tax to pay on the money released under equity release.
You should note that the amount of cash you have in savings can have an impact on your state benefits, so always take care to check your benefits eligibility first.
Equity release can offer a solution for many over 55 homeowners looking for a boost to their finances, but it is not for everyone. Getting advice is a necessity and it is also important to talk things over with family and loved ones because taking out equity release is likely to affect them too by reducing their inheritance.