A lot of myths remain about equity release loans – here we dispel some of the common misconceptions about lifetime mortgages.
Thinking of applying for an equity release mortgage but concerned about the potential drawbacks? A lot has changed since the 1990s when home reversion loans were mis-sold and borrowers died leaving beneficiaries with no inheritance or, worse, negative equity. Since then, the Equity Release Council has brought in stringent measures, ensuring that customers receive independent legal advice and undertake a consultation period with their lender before they take the leap. What’s more, modern lifetime mortgages differ from home reversion loans and can enable homeowners to unlock much-needed cash while still owning their property and leaving an inheritance for their loved ones.
‘Equity release mortgages are a scam’
Equity release mortgages are a type of loan secured on your home, enabling customers to release a cash lump sum or regular income from money tied up in their property. They have had bad press in the past and rightly so. In the 1990s home reversion mortgages – a different type of loan secured on your home where ownership of the property reverts to the lender - were indeed mis-sold. However, since then the regulating body, the Equity Release Council, has introduced stringent measures to ensure that customers receive independent legal advice, explore other options first and only take out a lifetime mortgage if there is no alternative. What’s more, providers are also regulated by the Financial Conduct Authority. Lenders take the time to get to know their customers and their needs to ensure that a lifetime mortgage is the right choice for them.
‘I won’t own my own home any longer’
Unlike a home reversion loan, taking out a lifetime mortgage doesn’t affect the ownership of your property – it will still be yours. You are simply borrowing against its value. In the right circumstances, it can be a useful way to unlock money tied up in your property.
‘My children won’t inherit anything’
In the past, taking out an equity release mortgage could mean that your children might be left without an inheritance. But with lifetime mortgages it’s possible to protect a portion of the future value of your property. Plus, it’s also now common for people to use equity release as a way of gifting money to their children while they are still around to see them enjoy it. The unlocked cash can be used to provide a leg-up on the property ladder, a new car or money towards grandchildren’s university fees, for example.
‘I’ll have to make monthly repayments on the loan’
A lifetime mortgage is just that – for your lifetime. The plan ends when you die or enter long-term care and your property is sold. The loan and the roll-up interest are paid off from the proceeds of your home sale so there is no need to make monthly repayments unless you wish to. In some cases, other family members are able to make repayments on the loan too.
‘I can’t move house’
Lifetime mortgages are portable so if your circumstances change and you decide you want to downsize or move to another property, you can do so with downsizing protection in place. You just take your lifetime mortgage with you. If the unthinkable happens and your partner dies after you have both taken out an equity release mortgage on your home, with downsizing protection you can move to a smaller property, pay off the loan and early repayment fees will be waived.
‘I’ll leave behind debts when I die’
In the past, people who took out equity release mortgages could end up leaving behind large debts which would need to be repaid by their loved ones after they passed on. But under the Equity Release Council’s regulations, lifetime mortgages come with a ‘no negative equity guarantee’ meaning that you never end up owing more than the value of your home. If the mortgage holder dies or moves into long-term care, their property is sold and the loan repaid, with any leftover proceeds left as inheritance for their loved ones. If the property sale generates less than the value of the mortgage, the outstanding balance is then written off by the provider.
There are pros and cons to taking out an equity release mortgage. Always take specialist legal advice and think carefully before securing a loan on your home.
Written by Piper Terrett, Fluent Money Group