Equity Release Myth Busting
Mark Thompson talks us through some common myths surrounding equity release.
What is equity release?
Perhaps the first question we should answer is ‘what is equity?’ – and it is basically the money that you’ve got in your property.
Say you had a £100,000 house and no mortgage. You could argue that you’ve got £100,000 worth of equity, because that’s what your property is worth. If you’ve got a £100,000 house and a £50,000 mortgage, then you’ve got £50,000 in equity. Once you’ve taken the mortgage off the house price, the money left over is £50,000.
Equity release is simply a way to get your hands on some of that money that’s tied up in your house.
Myth 1: Equity release isn’t regulated, it’s not safe.
It’s fully regulated. It’s closely monitored and regulated by the Financial Conduct Authority and it has been for many years.
Back in the 1980s it was used for poor reasons – people taking money out to invest in businesses, for example, and regulation at that time wasn’t very good. That’s why you still hear some horror stories, and why people have negative perceptions.
A body was formed in 1991 called the Equity Release Council to oversee this industry. They set up a Code of Conduct that everybody now works to.
We have to be separately authorised. So whilst I’m authorised as a mortgage advisor, I had to take separate exams and gain different authorisation to advise on equity release.
Myth 2: It’s a lifetime mortgage, so I have to stay in my property for the rest of my life.
With a lifetime mortgage, it just means that the term of the mortgage is for life, and it’s fixed for life. At one point there was a variable rate equity release mortgage where the rate went up and down. I’m not sure that exists any more.
So a lifetime mortgage has a fixed percentage until you die or go into long-term care. You do have “the equity of redemption” so you can repay the mortgage at any stage if you want to.
If you come into some money or you decide you want to move, you can pay the mortgage off.
As with most fixed mortgages, and subject to certain conditions, you could also transfer the mortgage to another property. So you’re certainly not stuck in the same property.
You also don’t have to do equity release on the house you’re in. That’s a big myth. In fact, I help a lot of clients buy new homes using equity release. It’s got to be their main residence, but they use it to buy a new property.
Myth 3: You could end up owing more than your house is worth at the end – leaving your family with debt.
The Equity Release Council’s Code of Conduct means that all products have a no negative equity guarantee. We don’t offer any mortgage where you could leave a debt.
With equity release you can opt to make payments, or make no payments at all. In the latter case the interest will roll up or ‘compound’. A lot of people worry that they’re going to end up with nothing left in their houses after a certain number of years – but you cannot end up owing more than your house is worth.
The lenders are taking a risk in lending you the money – if you live for a long time and don’t pay any money back, they’re in danger of losing out because they can’t charge you more than the house is worth. So this one is a big myth.
Just on the interest – if you choose not to pay the interest, the size of the loan will increase and the interest will compound. But you can actually choose products where you’re servicing that interest. In other words, if you’ve got extra funds you can pay up to 10% of what you owe each year without any penalty.
Some people don’t want the interest to roll up and make payments to mitigate the debt. That way, it doesn’t go up dramatically – or indeed at all.
Myth 4: equity release rates are really expensive
All rates at the moment are going up and down like a fiddler’s elbow [podcast recorded in July 2023]. But until recently, equity release rates were at an all time low.
It does depend on how much you borrow, how old you are and what percentage of your property value you’re looking to borrow. That’s what we call the Loan to Value or LTV.
If you’ve got a £500,000 house and you want to borrow £20,000 then the rate will certainly be less than if you wanted to borrow £200,000. As we just said, there’s a big risk to the lenders, with the loan increasing over time if it’s not paid back.
Depending on your circumstances, you can probably get a lifetime fixed rate that’s equivalent to a standard mortgage. There are people fixing their mortgages for life at less than the variable rate which is about 7.99 at the moment.
But every situation is different, and it’s fluid as well. I might change the product or the rate for a client as we go through the process, depending on what rates do.
Myth 5: I’ll lose control and ownership of my home.
This is usually the first thing people worry about. They don’t want to lose their home. Something we haven’t actually covered here yet is that there are two forms of equity release.
The more common form a few years ago was a ‘home reversion plan’ where rather than taking a mortgage on their property, people were actually selling a share or all of their property to a provider. They were allowed to live in it for the rest of their lives or until they went into long-term care.
That’s where people got this perception that they no longer own their home. But now lifetime mortgages make up nearly all of the market. You hardly ever see a home reversion plan today.
A lifetime mortgage is like any other mortgage. You still own your own home. You just have a mortgage on it. If you want to sell that house or you die, that mortgage has to be paid off. You don’t lose control of your home – that is a really big myth. It’s a mortgage, it just happens to be fixed for life rather than for five years or so.
Myth 6: I haven’t paid off my existing mortgage so I can’t look at equity release.
A lifetime mortgage has to be the only mortgage on your property. But if you’ve already got a mortgage it’s quite common for people to use equity release to pay it off.
One of the biggest reasons people are coming to me at the moment is that they’ve got an interest only mortgage. They’ve had it for many years, paying the interest but not the capital loan. Now they are getting towards the end of their term and they’re worried about what’s going to happen. At the end of the mortgage they have to actually pay off the original borrowing or sell the property.
If they can’t afford to pay off the mortgage, a lot of people turn to equity release. At the moment standard interest only mortgage rates are going through the roof – if they’re on the variable rate they’re getting up to 8%. People are frightened they will go even higher – whereas depending on circumstances, their age, equity in the house etc., they could take equity release and pay off their existing mortgage.
They then have the option of making payments if they want to keep the loan down – or not – but at least the ball’s in their court. They’re not having to make payments every month. It can be painful for older people with interest only mortgages who don’t know how to make ends meet. They’ve got to keep making these payments to stop the home being repossessed. It causes a lot of stress for anybody – but older clientele in particular.
What are the common uses of equity release?
People release equity to do a lot of things. A big one is home improvements – new kitchens, bathrooms, conservatories and converting houses to be more user-friendly.
As we’ve said, it can pay off existing mortgages. Debt consolidation is common too. It’s amazing – and saddening – how many people have debt in later life. They have heavy loans that they’re struggling to pay, and equity release may be the solution.
People also use it for holidays, cars or gifting money to friends or family. It can help your children get on the housing ladder – as we’ve said before, the Bank of Mum and Dad is probably the tenth largest lender in the country.
What if a client’s circumstances change during the application process?
We can’t recommend equity release to anybody if it’s not right for them. I get enquiries all day from people thinking about equity release.
But we don’t do just ‘execution’ – I’m an adviser at the end of the day. I can’t recommend that you take equity release if it’s not suitable. We don’t do it.
If somebody’s situation changes during the process then it may become unsuitable. If you win the lottery halfway through, for example, you wouldn’t need it. You should only take equity release if you have a specific need and there are no other, more suitable, alternatives.
It can be the best solution for a lot of people, but not everybody. That’s why you have to speak to an advisor, who should fully ensure whether it’s right – and that can change. Situations change all the time. So we’ve got to adjust to that.
What criteria are important for equity release?
On the basis that you don’t have to pay the money back, the main thing to mention is that you don’t have to be earning money to take equity release. The key factor is how much equity you have in your property.
Also, would your property be good security? If I’m going to lend you money for life and get my money back on the sale of your house, as a lender I want to make sure that house is going to be resaleable.
One of the biggest reasons why people can’t get equity release is because their properties don’t qualify. They may be near commercial premises – next door to a pub, for example, or above a block of shops. If something could affect the future sale of a property, it could affect. whether somebody gets equity release.
The other main criteria of course is that you’ve got to be over 55. The older you are, the more they will lend you because you’re less risky. Lending money for life to an 85 year old is lower risk than lending money to a 55 year old. The 55 year old could live a long, long time. A lender would be more nervous if they aren’t paying any money back and property prices dropped, so they would lend less. So the older you are, the easier it is to borrow money.
It’s almost the reverse of a normal mortgage. As you get older with a normal mortgage, they are less likely to lend to you, because you might struggle to pay it back in your pensionable years.
What about beneficiaries concerned about their inheritance?
You come across everything in equity release – some clients don’t care about the beneficiaries and are happy to release money regardless. They’ve provided for their children all their lives and aren’t worried about leaving them anything more.
Other clients don’t want to release money at all because they want the family to get it all. Often those children are asking their parents to release some money from their equity. They don’t want the money but the parents obviously need some help.
I’ve got a case like that at the moment, where the children are desperate to get the parents to take equity release – whereas the parents want to leave the money for their inheritance. But those children have their own income and wealth anyway.
If people are particularly concerned about beneficiaries getting some money, they can gift some to them now – that’s quite popular. You can give it now and see them enjoying it.
My poor old dad died at 83 and we always told him to spend his money. He didn’t, and he died, and we’ve all inherited money – but we didn’t need his money. We’d have been quite happy to see him spend it. Most children are more worried about their parents having a good quality of life than the inheritance that they’re going to get.
There’s always the odd one who is worried about what they’re going to get out of it rather than how their parents are living, but thankfully that’s quite rare.
If clients do want to protect some money you can set aside a percentage of the property’s value. Say, for instance, I’ve got a £100,000 house and I’m allowed to borrow up to 20% or £20,000. I could either take that £20,000 lump sum or I could actually just take £10,000 and guarantee 10% as an inheritance. Then a minimum of 10% of the property will be available to my children in the event of my death.
Guaranteeing some inheritance will reduce the amount you can borrow, but some people want to do that. Interestingly, I was speaking to one of the major providers and they say it’s almost unheard of for people to do that now.
People have generally found there was money left at the end of the day, anyway. Everybody thinks there will be no money left with equity release – but in fact there can be lots of equity left at the end – that goes to your estate which then goes to your beneficiaries. So protecting equity is there if you need it, but it isn’t that popular at the moment.
What else should people consider with equity release?
Only that every situation is different. That sounds like an obvious statement, but a lot of my business comes from financial advisors who don’t do equity release, but they know it can be a potential solution for their clients.
Some advisors call me two or three times a week with client situations. Between us we can ascertain whether it’s right for the client or not and what other potential solutions there might be. Every client situation is different which is why it has to be fully advised.
With a normal mortgage you could go straight to the bank and they will have five or more products for you to choose from. You can’t do that with equity release. You can’t go directly to the lender. It has to be an advised process.
Obviously, when we’re giving advice we look at the overall situation. I’ve got a call later today with a couple who are thinking about equity release. We’ve got two hours scheduled for our initial discussion and fact find. It’s never a snap decision. It’ll be one and a half to two hours of full discussion – and then we’ll have more conversations. It isn’t a quick process.
We have to consider a client’s situation today, tomorrow, next year and in years to come. We’ll look at their full position before we advise whether it’s the right thing or not. That protects the client, it protects us and it protects the industry. The Equity Release Council is there to make sure that it doesn’t get a bad name, as it can be a good solution for many people in later life.
A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.
The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.
A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action. If you are considering releasing equity from your home, you should consider all options available before equity release.
The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution. As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.
