10 min read

How does equity release work? Read our lifetime mortgages myth buster

Equity release comes in two main forms; home reversion plans and lifetime mortgages. Here we focus on the latter and tackle some of the common myths around how they work.

Over 50s couple in their garden

Lifetime mortgages allow homeowners over 55 to release some of the equity in their home, without the need to move. They may reduce the value of the customer's estate and affect their right to means tested benefits. So it's important to seek professional guidance from a financial adviser, to help ensure the customer gets the right product for their individual and family circumstances.

Some of the negative myths stem from the 1990s when there were less stringent regulations and the product received some criticism. The industry has evolved, with a range of lifetime mortgages that now aim to protect the customer and their property whilst helping them to enjoy their later years.


If I take an equity release loan on my home I could lose my property

One of the biggest concerns from homeowners when they are considering a lifetime mortgage is that they will lose their home. But this fear is misplaced as all members of the main trade body, the Equity Release Council, offer a no negative equity guarantee.

This means even if the housing market crashes and homes drop in value, or the loan and interest owed add up to more than the property, customers will never owe more than the value of their home, or be expected to move out.


I can’t sell my home if I have a lifetime mortgage. And if I do I’ll have to pay high fees

There are different options with lifetime mortgages. Depending on the provider, many lifetime mortgages give homeowners the option to move after five years and transfer their lifetime mortgage to the new property without paying any additional charges. A new advice fee might be applied if the new property required a higher loan amount, but again, this depends on the provider.

After ten years customers can pay back the entire loan without incurring any early repayment charges. It’s all about finding the right lifetime mortgage product for you and your family’s circumstances.


If I take out a lifetime mortgage my house will be valued at less than it’s worth, and I won’t get a good deal

Providers use independent surveyors to do valuation surveys of properties they are lending on. Generally they will also compare the valuation to three similar houses sold in the same area within the last 12 months. This helps ensure properties are valued at the current market price.


If my house goes down in value I’ll have to move and pay the money back straight away

The only time the funds from a lifetime mortgage are required to be paid back is when the homeowner goes into long-term care or dies. The homeowner can choose to pay the loan or the interest back sooner but it’s up to them.

All lifetime mortgages have a no negative equity guarantee so even if the property goes down in value, homeowners will never owe more than the value of their home.


Because the interest builds up every year I won’t be able to leave my family an inheritance

Compound interest on a lifetime mortgage is a choice. Many providers offer mortgages where homeowners can pay the interest off monthly, meaning the original loan amount stays the same.

Homeowners can also pay back up to 10% of the loan each year without incurring fees, meaning they will be reducing the interest and the capital. For example, if a homeowner takes a loan of £100,000 they can pay back up to £10,000 each year.

These options provide homeowners with more control over the value left in their property, and can help make sure there’s still value in the family home for other members to inherit.

If I take out a lifetime mortgage neither myself or my family will have control over what happens to my house in the future

The property remains owned by the homeowner and if they die it will go to their chosen beneficiary. The beneficiary then has up to 12 months to pay back the lifetime mortgage. This can either be done by selling the property or they can choose to pay the money themselves and keep the property.

 

I can’t use a lifetime mortgage to develop my property

Homeowners can use the money how they want. A common use for lifetime mortgages is for home improvements. In some cases, homeowners use the loan to fund an extension or annex on their properties, either for themselves or their extended family to live in.

In some cases, homeowners move into the ‘granny annex’, and the younger family move into the main property.

 

Lifetime mortgages are just a way for con men to trick you into giving up your biggest asset

Lifetime mortgages are a way for homeowners to release some of the equity in their property that they could only otherwise access by selling it. They can only be taken with advice from a fully qualified financial adviser, to ensure borrowers are aware of the terms and conditions of the loan before they sign on the dotted line.

Advisers should make sure the customer is aware of all the options available to them. They will discuss the features and risks of the product to help the customer get the best deal and product that's right for them. This support helps provide an additional level of comfort to potential customers, allaying fears, correcting misconceptions and keeping them fully informed.

 

I can’t have a lifetime mortgage if I own more than one property

There are different mortgages available depending on circumstances. For example, homeowners can take out a mortgage on their own home, or on a buy-to-let property. It’s also common for over 55s to use lifetime mortgages to buy a holiday home.

 

Lifetime mortgages are just for people with very expensive houses

OneFamily offers lifetime mortgages on properties worth £70,000 and upwards. Even if a home if worth less, it might only take minor changes to make it worth more.

 

If I take out a lifetime mortgage my house will be sold for less than it is worth

When it’s time for the lifetime mortgage to be paid it’s up to the homeowner or the beneficiary to sell the property in the usual way through an estate agent or online.

 

 

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.