Homeowners are turning to equity release in ever greater numbers to help supplement their income, help their kids onto the property ladder, plug an endowment shortfall or just release a bit of cash to pay for the holiday of a lifetime.
There are now more deals out there than ever before, with increasingly flexible options to suit to your own individual circumstances.
But many homeowners are still unsure of how equity release works. With this in mind, here are our top five equity release myth busters, to give you a better idea of what's really on offer.
Rates are lower than ever
Equity release is currently more popular than ever - Equity Release Council research recently revealed that some £1.8billion in housing wealth was unlocked via equity release in the first half of the year.
As more homeowners have taken the product, lenders have innovated, with ERC research showing there are now twice as many deals on offer as last year.
This increased competition and appetite to lend has pushed down rates to historic lows, with the average rate now sitting at 4.91 per cent, and some deals even available below 3 per cent.
Depending on your circumstances, shopping around can find you an equity release deal with a rate akin to ordinary mortgage rates.
And because you have the option to not pay the interest each month like you would with a mortgage, you won't need to worry about passing lenders' affordability tests.
Drawdown options let you take a regular income
The main form of equity release which most people take is called a lifetime mortgage, and with this you usually have the option to take the money all at once or to take it on a drawdown basis - as and when you need it.
This means you take an initial lump sum at the start and then take further withdrawals at a later stage.
There is also the option to top up your monthly income by using this drawdown facility to release money each month.
This can help supplement your income, giving you a guaranteed amount each month for a set period of time.
The advantage of this is that interest accrues only on what you have already taken, so you aren't charged for the money that you don’t need right away. This can help to control the interest build-up on your loan.
Ringfence your inheritance
One of the concerns people have when considering equity release is how it will affect the inheritance they are able to leave behind when they pass on.
It’s true that equity release can eat into an inheritance, but you can also ringfence a portion of the equity in your property so that it's protected. This is known as an ‘inheritance protection guarantee’.
For example, if a couple was eligible to release £60,000, but wanted to make sure that their children would receive some money after they died, they could release £30,000 and leave the other £30,000 protected.
Releasing additional equity further down the road can affect this however, and it isn’t available on all deals.
No negative equity guarantee
As there are usually no monthly repayments with equity release, the interest rolls up and compounds until the property is sold.
This is usually when the homeowner dies or moves into long-term care. When this happens, the provider will reclaim the loan as well as all the interest that has rolled up.
Most equity release loans now carry a no negative equity guarantee.
This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
All members of the Equity Release Council are signed up to this commitment, so check that your provider is a member.
Refinance options are available
Your financial situation is not set in stone once you’ve taken an equity release deal and refinancing options exist, but this is unknown to most.
It will, however, depend on your balance of equity in the home, and whether there are any early repayment charges on your loan.
Some plans have what are known as 'gilt-based early repayment charges', which link the level of penalty to government bonds.
Other plans charge a fixed fee, which is calculated as a percentage of the loan, but these often reduce over time.
Borrowers who took out plans when rates were higher are likely to benefit
Speaking to a good adviser will be able to help here - but just because you've already taken a deal doesn't mean you will have to stay on the same rate, and the same terms, forever.
If you want to find out if Equity Release is right for you, please contact us today for a free no obligation quotation.
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