Retirement can be a time to enjoy your hard-earned savings, and maybe even treat yourself to something special. But if you’re thinking about using your home to unlock some extra cash, you need to be careful.
Equity release is a complex product that can be helpful, but it’s not right for everyone. There are a lot of misconceptions out there about how it works, so we’re setting the record straight.
Fewer People Choosing Equity Release
First off, fewer people are using equity release this year than last year. That’s according to the Equity Release Council (ERC), which keeps track of this kind of lending.
Between January and March, just 4,698 people took out equity release, a 31% drop compared to the same period in 2023. The ERC says people are being cautious because they hope interest rates will fall soon.
Myth #1: You Can’t Make Repayments
Some people think that once you get an equity release plan, you’re stuck with the loan forever. That’s not entirely true. With the most popular type of equity release, called a lifetime mortgage, you don’t have to make any interest repayments.
However, you CAN make repayments if you want to. But be aware – there are usually charges for doing so early.
Example: If you borrow £100,000 at 4.5% interest, you’ll owe £125,180 after just five years. After 10 years, that debt will jump to £156,699!
Myth #2: Early Repayments Always Cost You
You might think there’s a big penalty for paying off your equity release loan early. That’s not always the case!
Since 2022, you’re allowed to make small repayments without any penalty. This is good news if you want to gradually reduce your debt.
However, be aware: If you decide to pay off the entire loan early, there will usually be a charge. The amount you pay depends on how long you’ve had the loan. For example, it could be 5% after five years, or 3% after ten years. In some cases, the charge can be as high as 25%!
Myth #3: You Can Only Get a Lump Sum
You might think you have to take all your equity release money in one go. But you can actually spread it out over time. This is called a ‘drawdown’.
This can be better because you only pay interest on the money you’ve actually taken out. And if interest rates fall, you’ll benefit from the lower rates on your future withdrawals.
Myth #4: You Could Owe More Than Your Home Is Worth
This is a big one, and it’s important to understand. When you sell your house, the money goes towards paying off your equity release loan. Any money left over goes to you or your beneficiaries.
But what if you owe more than your house is worth? This is called “negative equity.”
To protect you, equity release plans that meet the ERC’s standards have a ‘no negative equity guarantee’. This means you or your family will never owe more than the value of your house.
Myth #5: You Can’t Move House
You might think that if you’ve got equity release, you’re stuck in your current house. But that’s not true.
You CAN move house, but your lender has to agree to it. They’ll usually check that your new home is suitable. They might not allow you to move to a retirement complex, for example.
It’s important to know: Even though your loan is secured against your property, it’s still your property. You can’t be evicted.
Get Expert Advice
If you’re thinking about equity release, it’s important to get advice from a qualified financial adviser. This is a legal requirement.
The ERC has a directory of financial advisers who specialise in equity release. Choose an adviser who can give you unbiased advice, not just recommendations for a single company.
Equity release can be a valuable tool to help you enjoy your retirement. But it’s crucial to understand the risks and the facts. Don’t be fooled by myths. Get expert advice and make sure you’re making the right decision for you.