Uncovering The 4 Little Known Truths About Equity Release in 2023
We review 4 little known truths about equity release, the downsides, alternatives and the rules around selling your home
and your options for downsizing when you've taken equity and how to avoid the pitfalls
Table of Contents
Table of Contents
Author Paul Murphy: Updated December 2023
Equity release enables homeowners over 55 to access the equity tied up in their property and has become increasingly popular over the past 10 years, but what are the 4 little known truth behind equity release?
How does it impact inheritance? What are the costs involved, what are the pitfalls to avoid, and are there still horror stories about equity release?
We compare equity release lenders and schemes to help you understand your options and get the right solution for your needs.
As experts in equity release, Later Life Finance delve into the 4 little known truths about equity release to help you make informed decisions with confidence when considering who are the best equity release companies and we dispel the myths.
In this article we will review the following
The 4 little known truths behind equity release:
1. You can make voluntary repayments
2. You can never owe more than the value of your home
3. You can guarantee an inheritance for your beneficiaries
4. You can still move home with equity release
Read the full breakdown below
The 4 tops tips behind securing the best equity release solution
The best lifetime mortgage Features, including voluntary repayments to manage compound interest, drawdown facilities to reduce the effect of interest (and ultimately the effect on your estate later down the line), to downsizing protection for moving home, the range of features with modern lifetime mortgages are vast and offer homeowners are real solution for financial flexibility in later life.
Let’s get started!
What are the 4 Little Known Truths About Equity Release?
Read on to discover the 4 little-known truths of equity release plus additional features you may find useful.
1. You can make voluntary payments
The first little known truth about equity release is that lifetime mortgages, the most popular form of equity release, allow you to make voluntary repayments to avoid or reduce the effect of compound interest on your equity release scheme.
This means you can preserve more of your equity as the plans can be run in similar way to a conventional mortgage, but without the risk of defaulting on payments, as making these payments is completely optional.
2. You can never owe more than the value of your home
The second little known truth about equity release is that neither you nor your beneficiaries will be burdened with additional debt when repaying the money borrowed if your home sells for less than you’d anticipated when you took out your equity release scheme.
If the sale of your home doesn’t cover what you owe on your equity release scheme, your equity release provider will write off the difference.
As a result, you and your estate will always be protected against owing more than your home is worth.
3. You can guarantee an inheritance with equity release schemes
The third little known truth about equity release is many people think an equity release loan will decrease the value of their estate until there’s nothing left, but this is something that can be avoided.
You’ll still be able to preserve an inheritance to your loved ones if you’ve released equity from your home.
A feature of certain lifetime mortgages is called ‘Inheritance Protection’ which means you’ll be able to guarantee that your children or other beneficiaries receive an inheritance when this feature is built into your plan.
4. You can still move home with equity release schemes
The fourth little known truth about equity release you can still move home if you’ve taken a lifetime mortgage, the most popular type of equity release.
You can ‘port’ which means move the lifetime mortgage with you to the new property, as long as it is acceptable for lending purposes, which means ‘standard construction’. Basically, the lenders are just looking to ensure the property is acceptable security for lending purposes.
What are the horror stories and pitfalls to watch out for?
While equity release may seem like a silver bullet for financial woes, it’s not devoid of potential pitfalls.
The market has evolved over the past 20 years with lenders and schemes becoming more flexible in favour of homeowners.
This has stemmed from real life experiences of homeowners being stung with high exit penalties for repayment.
For example, when one homeowner passes away, many older equity release plans had high exit fees which penalised surviving spouse for early settlement to downsize and settle the plan.
Most lifetime mortgage lenders now offer a feature where no exit fees apply for 3 years following the death (or going into long term care) of one homeowner, meaning their spouse/partner or joint homeowner can settle without any exit fees for 3 years following this event.
Other pitfalls have arisen from the level of interest accumulated from the plan over the years, with homeowners realising they owe the sum borrowed plus years of compound interest.
Equity release schemes can have numerous potential risks, including:
A decrease in property inheritance
Various fees and charges
High early repayment fees, which can pose a significant financial burden
Impact on means tested benefits
Therefore, it’s crucial to approach equity release with caution, armed with thorough knowledge and sound professional advice.
What are the 4 Top Tips About Equity Release To Consider?
Read on to discover the 4 Top Tips of equity release to discuss with your adviser.
1. Drawdown lifetime mortgages can offer the most flexible solution
The first top tip about equity release is that drawdown lifetime mortgages allow you to take the money in smaller amounts which can reduce the effect of compound interest on your equity release scheme.
This means you can preserve more of your equity and be in control when you take any further money from the mortgage. This feature is also known as a reserve facility and is a very popular form of equity release.
2. Downsizing protection is important to consider
The second top tip about equity release is downsizing protection is an option available and should be considered where moving home and settling the lifetime mortgage mortgage early is potentially on the cards.
This level of planning is crucial and will ensure you secure the best solution for your longer term plans.
3. Inheritance Tax planning with equity release schemes
The third top tip about equity release is a lifetime mortgage reduces the size of your estate on death, which can reduce your inheritance tax bill as a result.
This is worth considering when estate planning and considering whether gifting an early inheritance to your family may be beneficial.
4.Later Life Finance provide a long-term service
The fourth top tip about equity release is later life finance provide a long-term service for our customers, not just a one-off transaction, but a lifetime service for peace of mind and security in your home for the years to come.
For expert advice get in touch with us today on 0800 2465228.
Are there still equity release horror stories?
The key to avoiding any pitfalls with any financial scheme is getting proper advice with experts.
Equity release horror stories may put you off considering a lifetime mortgage or other plan, but in reality modern schemes help avoid the pitfalls by offering a greater level of flexibility for homeowners, such as downsizing protection.
What Do I Need To Consider When Setting up an Equity Release Scheme?
The Costs of Equity Release
There are setup costs associated with arranging equity release to consider. These costs, can range from £1,500 to £2,500 and include broker fees, lender fees and solicitor fees. Other fees to consider are early repayment charges for early settlement.
Broker fees, also known as advice fees are payable to your broker for sourcing and arranging the mortgage. The benefits of using an independent broker such as Later Life Finance is access to the full market and having the mortgage professionally arranged with an expert service to ensure a smooth process and to provide support and advice during the process.
Arrangement fees, also known as mortgage product or completion fees, are charged by certain lenders and frequently part of securing a more competitive interest rate on a fee paid or fee free option for two different interest rates on the same scheme. As they can be added to the mortgage or paid in advance, it’s crucial to remember if you add these to the mortgage interest will also be charged on this amount.
Early Repayment Charges
Early Repayment Charges (ERC) are potential penalties for repaying an equity release loan early. The charges vary from plan to plan, so it’s important to consider your longer-term plans and ensure you’re comfortable the scheme fits in with your plans for moving and downsizing, for example.
The Impact On Inheritance
Equity release can have a profound impact on the inheritance you leave behind.
It can diminish the amount of inheritance that beneficiaries receive as the funds obtained from the sale of the property to settle the equity release loan are subtracted from the inheritance.
However, equity release can also aid in inheritance tax planning by decreasing the IHT liability on your estate.
Inheritance Tax Implications
Equity release can also influence the inheritance tax implications.
The money obtained from equity release is exempt from taxation and not liable to income tax or Capital Gains Tax.
A lifetime mortgage is deducted from the value of your estate, which also has the effect of reducing IHT liability.
The Importance of The Negative Equity Guarantee
Another crucial aspect of equity release plans is the Negative Equity Guarantee.
This guarantee ensures that the borrower or their estate will never owe more than the property’s value when it is sold.
This feature is especially beneficial in protecting borrowers from financial loss and providing peace of mind when obtaining a loan, secured against your property, in compliance with the financial conduct authority. Additionally, this feature can be helpful for those receiving means tested benefits.
What is Negative Equity Guarantee?
A Negative Equity Guarantee is a clause that must be included in all equity release plans by members of the Equity Release Council.
This clause ensures that the estate of the individual will never owe more than the property is worth when it is sold.
This guarantee is of paramount importance as it safeguards you and your estate from monetary loss.
Even if the amount of their existing mortgage debt has exceeded the value of their home due to rolling interest, this guarantee ensures that you will never owe more than the eventual sale proceeds of your home.
Benefits of Negative Equity Guarantee
The Negative Equity Guarantee offers several benefits to borrowers, including:
Protection for your estate from financial loss
Assurance that you will never owe more than the property’s value when it is sold
Safeguard against the possibility of the property’s value depreciating
Peace of mind
Moreover, the Negative Equity Guarantee ensures that:
The maximum amount repayable to the lender is the sale price of the property minus any sale expenses
This guarantee is a standard feature of equity release plans
It is mandated by the Equity Release Council for all of its members
Flexibility and Features in Equity Release Plans
Equity release plans offer various types of equity release products, providing flexibility and features to homeowners aged 55 and over. These include:
The opportunity to access a lump sum of tax-free money
The option to protect a percentage of the property value for one’s loved ones
No mandatory monthly repayment
The option to make repayments if desired
These features make equity release plans an attractive option for those looking to unlock the value of their home through reliable equity release providers.
Drawdown facilities are a feature of equity release plans that enable borrowers to access funds as required, up to a previously agreed limit.
This flexibility allows borrowers to access funds as needed, rather than taking a lump sum all at once.
However, these facilities can be more costly than lump sum equity release plans, as they usually come with higher arrangement fees and interest rates.
Therefore, understanding these costs is essential to making an informed decision and planning your financial future.
Downsizing protection is another feature in equity release plans that allows borrowers to move to a smaller residence without incurring early repayment charges. This feature can be especially beneficial if you plan to downsize in the future, as it allows you to reduce the balance of your equity release plan without incurring any early repayment charges.
Before signing an equity release agreement, make sure to inform your equity release company or adviser of any plans to downsize in the future. This will allow them to incorporate a downsizing clause into your contract, providing you with added flexibility.
It’s crucial to understand the potential risks and drawbacks, including the horror stories and pitfalls, the costs, and the implications on inheritance.
The 4 little known truths behind equity release show there are more options available than ever for arranging flexible and safe home finance solutions with later life mortgages.
The 4 tops tips behind securing the best equity release solution help provide a useful overview to discuss with your equity release adviser.
Features including voluntary repayments to manage compound interest, drawdown facilities to reduce the effect of interest and ultimately the effect on your estate later down the line, to downsizing protection for moving home, the range of features with modern lifetime mortgages are vast and offer homeowners are real solution for financial flexibility in later life.
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