Four lesser known truths about equity release

Uncovering the truths and myths of equity release

With a simple search online it’s easy to find articles claiming to reveal the ‘myths’ or ‘little known truths’ about equity release. In fact, many of the ‘myths’ you’ll read about are becoming more well known, such as the fact that you still own your own home with a lifetime mortgage.

So we decided to go the extra mile by really getting under the skin of this over-55s financial product. We wanted to present you with some genuinely lesser known truths about equity release. We’ve gone further, too, with four equity release myths and a summary of some pros and cons of equity release.

In this article we cover the following to help you decide if an equity release plan might work for you or not:

• Four little known truths about equity release

1. Truth #1 Equity release isn’t just for releasing cash from your main residence
2. Truth #2 You can use equity release to buy another property
3. Truth #3 Having bad credit history won’t usually stop you from being approved
4. Truth #4 You could access a better equity release deal if you have a health condition

• Four equity release myths

1. Myth #1  You could end up owing more than your home is worth
2. Myth #2  You won’t be able to leave an inheritance
3. Myth #3  You won’t be able to move home with a plan
4. Myth #4  You can’t arrange equity release if you have previously been declared bankrupt

• Pros and cons of equity release
• More little-known truths
• Is equity release a good idea?
• Summary: getting the truth about equity release

Four little known truths about equity release

Truth #1 – Equity release isn’t just for releasing cash from your main residence

Some people mistakenly think you can only use equity release on your main residence. A number of websites with equity release information are presenting this as a fact. 

The truth is, if you are lucky enough to own another property you may be able to unlock some of your tax-free money from it with equity release. It could be a perfect alternative to selling the property or arranging a remortgage. 

As with all other equity release plans, the money you release from the property is entirely tax-free and yours to spend however you wish. If you have an outstanding mortgage on that property, then it is a condition of equity release that you clear it with the money you receive.

Specialist second home lifetime mortgages, and buy-to-let lifetime mortgages are available. Through Equity Release Wise you can explore your options to get the most suitable product and best deal.

Truth #2 – You can use equity release to buy another property

Have you ever found yourself dreaming of a little getaway by the coast? Or perhaps you fancy branching out into the rental sector? 

The good news is that as well as releasing cash from a second home or buy-to-let property, you may also be able to fund a purchase through equity release. 

One example is unlocking a cash lump sum from your main home to put down a deposit on another property, or buy it outright. Another option is to arrange equity release on a property you want to buy in order to complete the purchase. 

These options exist because of the increasingly flexible nature of equity release plans on the market. Our selected equity release advisers can help you understand what’s available and help secure a suitable product. Call us on 0808 178 3055 or request a call back for a time that is convenient to you to arrange an initial appointment with an expert.

Truth #3 – Having bad credit history won’t usually stop you from being approved

Many people consider equity release as a way to get on top of their finances and pay off mounting loans and credit card bills. But if previous debts have led to you having a poor credit history, you might worry that you won’t be eligible. The good news is that simply having a poor credit history is unlikely to affect your eligibility.

As there are no mandatory monthly repayments with equity release, you don’t have to prove your income. That’s why having a poor credit history won’t usually be an issue, although you may find that during your application your lender insists that:

• You use some of your equity release cash to pay off any secured loan arrears.
• You pay off other debts such as credit card debt from your equity release money so creditors do not process a claim via the courts.
• You repay debts related to any County Court Judgements (CCJs) with the money you release, or before your equity release money is released. 
• You settle an outstanding Individual Voluntary Arrangement. Your lender will specify whether you need to do this before applying, or once your plan has completed and you have received your money.

Truth #4 – You could access a better equity release deal if you have a health condition

The last of our ‘4 little known truths about equity release’ is one that may not be ‘little known’ for much longer as more and more people are finding out about it.

A special type of equity release is for those living with certain health conditions or lifestyle choices. An enhanced lifetime mortgage could see you achieving a lower interest rate fixed for life, a higher cash release amount, or both. 

Common qualifying health conditions include high blood pressure, high cholesterol and diabetes. Many other conditions could also entitle you to the lowest rates. They include a history of cancer, heart attacks or having a very high or low body mass index (BMI). Even being a smoker now or in the past could see you qualify

Not all lenders offer enhanced terms, so some advisers may not automatically check your eligibility. But at Equity Release Wise we don’t want anybody to miss out. To find out if you qualify for enhanced terms, contact us and our selected advisers will look into your eligibility.

Four equity release myths

Despite the wealth of information out there, many myths about equity release continue to spread. To help you separate fact from fiction, we’ve answered some of the most common equity release myths that you might come across.

Equity release myth #1: You could end up owing more than your home is worth

Myth busted: A property can never go into negative equity when equity release is in place.

This is one of the most common equity release myths. Some years ago it was possible to owe more than a house is worth, but today’s plans are much safer and very heavily regulated. By selecting a plan approved by the Equity Release Council, you can be certain that no matter how much interest accrues on your plan, you will never owe more than the value of your home. 

The ‘no negative equity guarantee’ is one of the Equity Release Council’s Product Standards. As long as your lender is a member, this standard will protect you and your family.

Equity release myth #2: You won’t be able to leave an inheritance

Myth busted: Many equity release plans enable you to guarantee an inheritance for your loved ones. 

With a lifetime mortgage you can choose to ring fence a percentage of your home’s value. This ring fenced amount is a guaranteed inheritance, regardless of how much interest accrues on your plan. With a home reversion plan, you can hold back a percentage of your home’s value that you don’t sell to the reversion company. The company returns this to your family once your house is sold. Usually it’s when you pass away or move into long term care.

Equity release myth #3: You won’t be able to move home with a plan

Myth busted: You can certainly move home after arranging an equity release plan: it is in fact a protected right. 

The Equity Release Council has a strict set of standards that all members must follow. One of them is that customers can move home and take their plan with them, as long as the new home meets their lender’s criteria. 

Equity release myth #4: You can’t arrange equity release if you have previously been declared bankrupt

Myth busted: This is far from the truth: you simply need to be ‘discharged’ from bankruptcy.

This means you’ll need to be released from any debts and any restrictions that were put in place by your bankruptcy. Being discharged from bankruptcy usually happens automatically after 12 months. It will remain on your credit file for six years but as we have said already, a bad credit history shouldn’t affect you being approved for a plan.

Pros and cons of equity release

So you’ve uncovered four lesser known truths about equity release, busted some common equity release myths… what else is there to know? 

Well, as much as we believe in equity release as a way to help over-55s take control of their finances, we know it isn’t right for everyone. We always want to provide a balanced view so before we finish, here are some of the main equity release pros and cons for you to consider…

Pros

• You can unlock the tax-free money you need without having to sell or downsize your home.
• You can continue to live in your own home for the rest of your life, or until you move into long-term care.
• You don’t have to make regular interest payments as the loan plus interest is repaid from the sale of your home. (But you can make voluntary payments without incurring penalties if you wish to reduce the total amount repayable.) 
• You can choose to receive the money as a tax-free lump sum or by drawing down regular, smaller amounts as and when needed.
• Equity release can be a lifeline for over-55s stuck on an interest-only mortgage with no other means of repaying it.

Cons

• Equity release will reduce the value of your estate and the amount of inheritance you leave to your family.
• The total loan amount can grow quickly as the interest rolls up on a compound basis. (However, you can reduce this by making interest payments with an interest-only lifetime mortgage.)
• Releasing equity may affect your entitlement to some means-tested state benefits.
• If you are receiving home care fully or partially funded by your local council, a cash release may affect your entitlement, or you may have to pay more towards your care.
• There may be early repayment fees to consider if you wish to repay the loan early, although some lenders waive these in some circumstances.

You can find out more about benefits and drawbacks of equity release by visiting our information page: The pros and cons of equity release.

More little-known truths

There’s much to know and understand about equity release, we couldn’t possibly cover it all in one go – but here are a few extra truths that you may find helpful to know at this stage.

You can end your lifetime mortgage early

Despite the name ‘lifetime mortgage’, you can in fact end your plan early. Be careful of early repayment charges (ERCs) though as they can be expensive. If you think you might want to end your plan early in the future then do let our selected advisers know. They can look for plans that offer lower ERCs, or that waive them in some circumstances. For example, some plans offer downsizing protection where you can pay off your plan penalty-free in some cases should you downsize in later life.

There are different types of equity release

We talk more about lifetime mortgages as they’re the most popular type of equity release plan, but they’re not the only option. Lifetime mortgages enable you to borrow against the value of your home with the option to either pay the interest or leave it to roll-up, freeing you of any monthly repayments. However, there is also a home reversion plan to consider. These involve selling all or some of your home to a reversion company in exchange for a cash lump sum or regular income. 

Equity release customers are fully protected

We’ve all heard equity release horror stories of days gone by, but today’s customers benefit from significant protections from multiple organisations to ensure consumer safety. Firstly, the Equity Release Council ensures all of its members sign up to abide by its guidelines which include the ‘no negative equity’ guarantee, the right to move your plan to another suitable property, and further important guarantees. 

In addition to this, the equity release industry is regulated by the Financial Conduct Authority (FCA) to ensure consumer protection. If you do ever make a complaint to your provider and find their response unsatisfactory, you can raise your complaint to the Financial Ombudsman Service.

Equity release doesn’t have to be a last resort

Whilst equity release is a last resort for some, that isn’t always the case for others. For some retirees, equity release is a way to enjoy their hard-earned money without selling the family home. More holidays, a new car, home improvements and even cosmetic surgery are all reasons some people access their property wealth.  

Monthly payments are optional

If you choose a lifetime mortgage then interest will accrue on your plan. However, that doesn’t mean you have to make any monthly repayments. If you wish, you can leave the interest to roll-up for the life of your plan, giving you a bigger disposable income to enjoy each month. 

Or, arrange an interest-only plan to pay off the interest for as long as you wish to prevent your loan from growing in size. Also, some lenders allow you to make voluntary and penalty-free repayments of up to 10% of your overall loan each year. If you kept up with the payments, you could pay back your loan in as little as ten years entirely penalty-free.

Is equity release a good idea?

Equity release could be a good idea for you if you have considered all your alternative options and ruled out other, less expensive ways to give yourself a cash boost. Alternatives to equity release might include using your savings, borrowing money from family or remortgaging your home, for example. 

You should remember that equity release will reduce the value of your estate and the amount of inheritance you leave. For that reason, it might not be a good idea for you if it’s very important that you leave all of your home to your family when you pass away. 

However, if you need the money and decide to go ahead then you can choose a plan with inheritance protection. This allows you to ring fence a percentage of your home’s value to guarantee a minimum inheritance for your loved ones. Or, you can choose to pay off the interest or make ad hoc payments so your loan doesn’t grow in size.

See our article ‘When is equity release a good idea? for more information on things to consider when looking into the suitability of equity release.

Whether equity release is a good idea for you or not depends on your individual circumstances. Our selected advisers are specialists in this field and will take the time to understand your situation and your financial goals to work out the best option for you. If that doesn’t involve equity release, they will tell you. 

Summary: getting the truth about equity release

If you have any more questions after reading through the above information, your next best step could be to talk to an equity release expert. Nothing quite matches having a conversation with someone who really understands equity release and how it could work for you.

At Equity Release Wise, our selected advisers are authorised and regulated by the Financial Conduct Authority to give you all the guidance you need to make an informed decision. They are also members of the Equity Release Council, giving you further reassurance that you’ll be told the truth about equity release and what a plan could mean for you.

For extra peace of mind, all the initial advice you receive will be free of charge, regardless of how many quotations you request or questions you ask. In fact, you will only receive a fee for advice if you choose to go ahead with a plan. To find out how much you could borrow, check here – or talk to one of our friendly consultants by calling 0808 178 3055 or request a call back to arrange pressure-free advice and information.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn