This week Craig is joined by Equity Release Specialist, Mark Thompson and challenges him to do some myth busting.
Myth 1: You have to stay in the same property for the rest of your life
Not true – some lifetime mortgages are portable. You can upsize or downsize as long as the property you’re moving to meets the lender’s criteria – which is often just that the home is of standard construction.
You also have the right to pay the mortgage off, which is called equity redemption.
If you took out a lifetime mortgage when rates weren’t as good or perhaps the terms weren’t as good, you don’t have to stick with it. You can remortgage to new lifetime mortgages – there is a big market for this at the moment.
Myth 2: I will leave a debt to my loved ones
Today’s products are endorsed by the Equity Release Council, which means there is a ‘no negative equity guarantee’. You can never owe more than the property is worth or leave a debt behind. Once the property is sold, any equity is passed on to your beneficiaries, but there will never be any debt.
You can also protect a certain amount of the equity to make sure that your family receive a certain inheritance.
Myth 3: If I’ve got an outstanding mortgage already, I can’t do equity release
Not true – in fact, a lot of people use lifetime mortgages to pay off their outstanding mortgage. Some of those with interest-only from the bad old days, supported by an endowment that didn’t perform, are using lifetime mortgages to pay off their debt.
It is true that, in the main, you can’t have a lifetime mortgage alongside another mortgage. Once you have a lifetime mortgage, most lenders would restrict you from taking a second mortgage on your property.
Myth 4: it’s not possible for me to reduce the outstanding debt.
Most lifetime schemes offer the option to make interest only and/or capital repayments. As with many standard mortgages, you can pay up to 10% of the original debt per year without any penalties.
Some clients take lifetime mortgages, but then decide they don’t need all all the funds, or are receiving money that will help pay them off. They can then repay some or all of the debt.
As an example, a client came in this week to plan a lifetime mortgage, leaving equity to their daughter. The parents have no intention of paying off the mortgage or making any payments.
The interest will compound, and the daughter is suggesting that at some stage she may want to contribute some capital payments. This is allowed on the mortgage terms, and will reduce the debt on the property, protecting her future inheritance.
Myth 5: I won’t be able to leave my property as an inheritance.
When you die or move into long term care, the property is usually sold to pay off the lifetime mortgage. Any money left over then goes to the beneficiaries. You can, as we’ve discussed before, take out inheritance protection. At the outset, you might decide to protect 30% of the value in their property as inheritance.
In this case there is a cap to how much you can borrow. If you only want to borrow a small amount, inheritance protection is a good idea. If you want to borrow an amount nearer the maximum of your lending, then you might not be able to take out the inheritance protection.
Part of the attraction of lifetime mortgages, of course, is that property price rises should hopefully mean there is a good amount of equity left at the end of the mortgage.
Myth 6: Equity release is unsafe and unregulated.
It’s certainly not unsafe and it’s certainly not unregulated. There’s even more regulation surrounding equity release than for standard mortgages. To become an adviser in this field, you have to pass separate exams and it is fully regulated by the Financial Conduct Authority.
Plus, the Equity Release Council was established in 2012 to provide extra consumer protection and all mortgage providers must adhere to its codes of conduct and practice.
Myth 7: I’m going to lose ownership and control of my home.
In the 1980s there were various equity products, one of which was the home reversion plan where people taking the mortgage were actually selling their property to access the equity release. They were then given the right to stay in it for the rest of their lives. So back then, people did lose control of the property and ownership.
Those sort of reversion plans still exist, but they form a very small percentage of the market. With a lifetime mortgage you always own your own home. As long as you don’t breach the terms of that mortgage, the lender will not be able to take the property away from you. So it’s just the same as a standard mortgage.
Myth 8: I’m going to owe more than the value of my home.
This is a big myth. As we explained earlier, the Equity Release Council Statement of Principles ensures that all mortgage providers feature a no negative equity guarantee. This means a property owner will never owe more on a lifetime mortgage than the property is worth.
Even if, at the end of the Lifetime Mortgage, the property is sold for less than the mortgage amount, the estate will not owe any money.
The worst case scenario is that you live long past a hundred, and there’s no equity left because you’ve let the interest compound up to the full value of the equity. But you will still go out owing nothing.
How do I explore Lifetime Mortgages?
To understand how a lifetime mortgage might work for you, have a chat with an adviser. When people come to me, we don’t go straight into looking at products. We just chat about it, make sure they understand it and can learn at their own pace. It might take a few months for them to decide whether it’s the right approach.
Ultimately, how you plan for retirement and inheritance is very important, and everyone’s situation is different. We’re here to help people explore the options and reach the decision that works for them.