Equity release schemes have received their fair share of bad press in the past. Any comment to the effect that they might not be for everyone has been seized on as meaning that they are really for no one.
These and other myths are just that – simply not true.
So, it might be worth revisiting just some of these enduring myths, examine whether there is any truth to them – and finally debunk them.
Myth 1: Equity release denies my children their inheritance
To understand how this particular myth has gained currency, it is helpful to consider just how equity release works – and who better to provide the answers than the industry’s own regulator, the Equity Release Council.
Equity release may take one of two basic forms:
- a home reversion plan involves your “selling” the whole or part of the home you live in, in return for a single cash payment or a regular monthly income;
- but you continue to live in your home rent-free – treating it just as you did before – and it is only when you die or move into long-term residential care that the buy takes possession of that proportion of the property that has been sold;
- the share in the home that you sold under the home reversion plan remains the same until the end of the agreement so that the proportion of it that remained in your ownership is available for passing down to your children in your Will;
- alternatively, a somewhat more popular form of equity release is a lifetime mortgage;
- just as the term suggests, this is a way of borrowing a cash lump sum against the value of the whole or just a part of your home;
- the difference from a regular mortgage, however, is that there is no capital or interest to repay – instead, all repayments are rolled over until you die, or you move into long-term care, when the home is sold and the lifetime mortgage is repaid;
- in the meantime, you continue to live in your home.
Debunking the myth
Clearly that part of your home which you have sold by a home reversion plan or the lifetime mortgage which needs to be repaid is no longer available as an inheritance for your children – you may already have spent it in the process of using the proceeds to increase your pension pot.
But the proportion of the property which is not sold or subject to a lifetime mortgage remains part of your estate and is available for handing down through your Will – and this amount may be safely guarded or “ring-fenced” for that purpose.
Before that time, of course, there is nothing to prevent your passing any of the proceeds of equity release schemes directly to your children.
Myth 2: Equity release schemes are unregulated
Debunking the myth
It is a myth that equity release schemes are unregulated.
Self-regulation of the industry by the Equity Release Council has already been mentioned, but since 2004, all equity release schemes and providers have also been regulated by the Financial Conduct Authority (FCA).
Together, these two regulatory bodies ensure that the consumer is protected in the way that equity release schemes may be sold and how they work.
This includes an assurance that full, clear and transparent equity release advice is given, both at the point of sale and throughout any equity release agreement.
Regulation also ensures that equity release schemes have in-built “no negative equity provisions”.
If you have a lifetime mortgage and the value of your home is sufficient to repay the mortgage (its capital and accumulated interest) when it is sold, the no negative equity provisions mean that any outstanding mortgage balance is regarded as having been repaid.
If you entered a home reversion scheme, the no negative equity provisions mean that if there has been a fall in property prices and this leads to a shortfall in what you have already received in payment, the debt is written off.
Myth 3: my surviving family members are going to be saddled with my debt
There is a common misconception that equity release schemes are likely to leave your family with the debts you incurred – a lifetime mortgage needs to be repaid, for example, or your home falls in value, and there are insufficient funds to cover the cost of any home reversion scheme.
Debunking the myth
The myth results in a misunderstanding of the way in which equity release schemes work.
A lifetime mortgage is repaid when your home is eventually sold. The repayment is made from the proceeds of the sale, so no debt is left with your estate – or the inheritance due to your children or other beneficiaries of your Will. The no negative equity provisions of any equity release scheme mean that neither you nor your estate are liable to repay more than the market value of your home and the agreed proportion that has been mortgaged or sold, when the property is eventually sold.
Myth 4: I’ll be stuck and unable to move home
Some people believe that a lifetime mortgage or home reversion plan means that you are committed to staying in your current home for the rest of your life – that you are unable to move, to downsize, for example.
Debunking the myth
A story published in the Express newspaper on the 18th of March 2018, puts paid to this myth by explaining that most equity release schemes allow you to move home, subject to certain restrictions. You are unlikely to be able to move into a static caravan park home, for example, but otherwise take your equity release plan with you.
Alternatively, you might want to choose an equity release plan with in-built downsizing protection, which allows you to pay off your lifetime mortgage (from the proceeds of the sale of your existing home), without paying any financial penalty.
The apparent complexity of a number of financial products seems to create an atmosphere in which myths abound – and equity release schemes appear to attract more than their fair share.
Equity release may not be the solution that is right for everyone – and independent financial advice is likely to be a first step – but that is not to say that this method of releasing valuable capital locked up in the home you own may not be suitable for you. Hopefully, the discussion so far has helped to dispel a few of those myths.