While financial terms and products overall can be enough to give most of us the chills, equity release does come with its own special brand of fear.
With the way house values have skyrocketed over the last few decades, many people are sitting on, or in, an asset of considerable sum – their home.
What is equity release?
Equity release allows people who are asset-rich to release some of the money tied up in their home without having to sell it or move to another place.
An equity release scheme can be structured in such a way that the borrower can take a lump sum in one go or monthly income over time.
Of course, there is nothing new about equity release. It has been around for a good while now, but with the government’s recent radical changes to annuity rules, equity release finds itself back in the spotlight.
Information on equity release is usually followed with a caveat that says it isn’t a solution for everyone and would suit some people and not others. In other words, exactly the kind of statement that covers rear ends but doesn’t provide any use to anyone else.
Just about any financial solution is not a fit-for-all solution, so in which circumstances could equity release work to the benefit of the home owners?
Dispelling myths about equity release mortgages
People are wise to maintain some reservation when learning about any potential financial solution, but the media in many ways has highlighted a lot of negative, and sometimes misleading information, about equity release mortgages, without providing insight into the positive, or helpful, aspects of this option.
First, while they are often highlighted as an option for people looking to release funds for their elderly parents’ care, equity release mortgages can be availed by people as young as 55.
Equity release mortgages, also known as lifetime mortgages, are more expensive than traditional mortgages, usually starting at an interest rate of around five per cent as opposed to the usual four per cent high street mortgages begin at for people wanting to buy a house. This fact is often used to lambaste equity release mortgages, pointing out how expensive they are.
However, a borrower can lose their home with a traditional mortgage but not with a lifetime mortgage, and this fact most times is not highlighted.
Equity release mortgages are made up of different funding models and there are conditions for the borrowers of these mortgages to fulfil and adhere to, such as maintaining the house to a proper standard and not subletting out the house or part of it, but with far stricter regulation than in the past, people can’t lose their homes if they abide by the contract they sign to secure an equity release mortgage.
Aviva found a lot of confusion around equity release mortgages when it surveyed 1,200 home owners in the UK. Most (87 per cent) of the group surveyed maintained that they had a good understanding of equity release but 21 per cent still thought that their home would be at risk.
Bear in mind that equity release mortgages are looked at as a long-term solution. Penalties will apply if borrowers try to settle their lifetime mortgages early, but some equity release mortgages can be structured so that borrowers can pay back some, or all, of the interest they incur and leave a larger value still in their houses.
Online resources on equity release
The Equity Release Council provides the most unbiased information in a clear way. Its FAQ page is the place to head to for an answer to most questions a person can have on lifetime mortgages.
Which? branded equity release mortgages as a rip off recently, but it does have a page on its website devoted to the topic, laying out the problems to be aware of with lifetime mortgages very succinctly.
Saga has a dedicated page too on equity release mortgages, and perhaps most helpfully, provides case studies of where an equity release mortgage could be the ideal solution. Although these are fictional, the scenarios are instantly recognisable and provide good information on how much equity can be released from a home and how the money pays out.
There is no doubt that equity release requires people to do their homework before embarking on it, but it might also not be the monster of the financial world either, and in some situations, could even be a saving grace.