Research revealed just one in ten over-55s understood the how equity release, which allows retired homeowners to unlock some or all of the cash tied up in their home, works.
To help clear up the fact from fiction, Simon Stanney, equity release director at SunLife has busted some common myths.
Myth 1 – It’s unregulated
In the past, equity release was unregulated, but now all equity release providers and advisers are regulated and supervised, by the Financial Conduct Authority (FCA). This means all equity release advisers, brokers and lenders must get permission from the FCA to sell equity release products.
The Equity Release Council (ERC) – a trade body that represents the equity release industry – also provides another level of protection because all members have to follow the Council’s Statement of Principles which include the ‘no negative equity’ guarantee, which ensures you’ll never need to pay back more than the value of your home, and ‘security of tenure’ which guarantees you can stay in your home for life.
Myth 2 – I can’t release equity because I’ve still got a mortgage
Actually, one of the top 5 reasons why people take out equity release is to pay off their mortgage, but according to our research, 65% of over-55s wrongly assume that if you have a mortgage, you can’t take out equity release.
If you do have an existing mortgage and take out equity release, the amount you release has to clear the existing mortgage or any other debt secured on the property, then after that, the remaining money can be spent as you want.
Myth 3 – I can’t leave an inheritance
A quarter of over 55s think that if they take out equity release this means they won’t be able to leave an inheritance. But, while you won’t be able to leave your home behind for your loved ones – the money from the sale of the home will be used to pay off your loan – any funds remaining will go to your estate.
And if you want to guarantee an inheritance for your loved ones, you can. You can ringfence some of the value of your home to leave behind; you will need to tell your adviser they will be able to recommend a plan that enables you to do this.
Myth 4 – I’ll leave my family in debt
Due to the FCA regulation and ERC principles, when you take out an equity release plan, you’re fully protected by a “no negative equity” guarantee which means contrary to popular belief, you will not be leaving your family in debt.
The no negative equity guarantee means that, even though the amount released, plus interest, will be a debt against your home, the amount charged will never be greater than the value of your house and will be covered by the proceeds from the sale of your home either when you die or move into long-term care.
Myth 5 – I could lose my home or be forced to move out
According to our research, 39% of over 55s think that if they take out an equity release plan, they could lose their home or be forced to move out, but this is not true. When you choose a lifetime mortgage, you are still the legal owner of your home. And when it comes to home reversions plans, you sell part or all of your home in exchange for a cash lump sum – but then you can live there rent-free until either the house is sold, you die or go into long-term care.
Myth 6 – I can never move house again
More than half of homeowners over 55 assume that if they take equity from their home, they will be stuck in that property forever. But, as long as you meet the criteria of your equity release provider, there is no reason why you can’t move and take your plan with you. There will be costs associated with moving the plan, but they will be explained to you fully before you take out equity release.
Myth 7 – I have to pay tax on the cash released
Our research shows that 55% of over 55s didn’t realise the cash lump sum released from your home was tax-free.
But, when you borrow against your home with an equity release plan it’s not classed as income which means there’s no income tax to pay on the money, although the amount you have in savings can affect any state benefits you are receiving or may be entitled to.
A final word…
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.
You can find out more by reading this blog about equity release.
[box style=”4″]
What Mortgage has teamed up with Equity Release Supermarket to answer your questions on Equity Release.
To read this month’s Q&A or to submit your own query, click here.
[/box]
