Equity Release Myth Buster
Equity Release Myth Buster: 12 Common Myths Explained
Will the lender own your home? Could your family inherit the debt? Will you be prevented from moving? Our equity release myth buster separates fact from fiction and explains what modern lifetime mortgages really mean for homeowners and their families.
Why Are There So Many Myths About Equity Release?
Equity release has changed considerably over the years, but many of the beliefs surrounding it have not.
Some homeowners are concerned that a lender will take ownership of their property. Others believe they could leave a debt to their children, lose the right to move or be forced to make unaffordable monthly repayments.
These concerns are understandable. Equity release is a long-term financial commitment, and products available many years ago did not always provide the flexibility and consumer protections associated with many modern plans.
However, it is equally important not to dismiss the genuine risks. A lifetime mortgage can reduce the value of your estate, interest can build up over time and releasing money may affect means-tested benefits.
We believe equity release should be explained honestly. That means correcting outdated myths while also being clear about the costs, risks and alternatives.
What Is Equity Release?
Equity release allows eligible homeowners to access some of the money tied up in their property without having to sell it and move immediately.
The most common type of equity release is a lifetime mortgage. This is a loan secured against your home, commonly available to homeowners aged 55 or over, although individual lender criteria apply.
You release one amount at the beginning of the plan and interest is charged on the full amount.
You take an initial amount and may have a reserve available for future withdrawals.
Depending on the plan, you may be able to pay interest, repay capital or allow the interest to roll up.
The balance is usually repaid when the last borrower dies or moves permanently into long-term care.
A home reversion plan is another form of equity release. With this arrangement, you sell some or all of your property to a provider in exchange for money and the right to remain living there under the terms of the plan.
Lifetime mortgages and home reversion plans work differently, so it is important to understand which type of product is being discussed.
Myth 1: “The Equity Release Lender Will Own My Home”
The truth
With a lifetime mortgage, you remain the legal owner of your property.
The lender places a legal charge against your home, in a similar way to an ordinary residential mortgage. The property is still registered in your name and you continue to benefit from any future increase in its value.
You will normally remain responsible for:
- Keeping the property in a reasonable state of repair
- Maintaining suitable buildings insurance
- Paying council tax, utilities and household costs
- Using the property as your main residence
- Following the other conditions of the mortgage
A home reversion plan is different because you sell a share or all of your property to the provider. This is one reason why the exact type of equity release plan matters.
Myth 2: “I Will Be Forced to Leave My Home”
The truth
A lifetime mortgage is designed to allow you to remain living in your home.
Plans that meet Equity Release Council product standards provide the right to remain in your property for life or until you move permanently into long-term care, provided the property remains your main residence and you follow the plan conditions.
For a joint lifetime mortgage, the plan will normally continue until the last remaining borrower dies or moves permanently into care.
You are not usually required to make monthly repayments with a standard roll-up lifetime mortgage. However, you must continue to maintain the property and comply with the mortgage terms.
Myth 3: “My Children Could Inherit the Debt”
The truth
A plan meeting Equity Release Council product standards must include a no negative equity guarantee.
This means that, provided the plan conditions have been met and the property is sold for the best price reasonably obtainable, your estate should not have to repay more than the net sale proceeds of the property.
If the mortgage balance is greater than the amount available from the sale, the lender accepts the eligible sale proceeds in settlement. Your children or other beneficiaries would not normally be personally responsible for paying the shortfall.
Equity release can still reduce or use up the value available from the property. The guarantee prevents an additional qualifying shortfall from being passed to your estate; it does not guarantee that a particular inheritance will remain.
Myth 4: “There Will Be Nothing Left for My Family”
The truth
Equity release will usually reduce your estate, but it does not automatically mean that nothing will remain.
The amount eventually left will depend on several factors:
A larger initial loan will generally reduce the remaining equity more quickly.
The rate affects how quickly unpaid interest is added to the balance.
Interest has more time to build when the lifetime mortgage runs for longer.
Future increases or decreases in the property value will affect the equity remaining.
Voluntary payments may reduce the balance or slow its growth.
Additional borrowing will increase the total amount owed.
Some lifetime mortgages offer an inheritance-protection feature, allowing you to ring-fence a percentage of the property’s future sale value. Choosing this option may reduce the amount you can borrow.
You may wish to involve your family in the discussion, although the decision remains yours.
Myth 5: “I Cannot Make Any Repayments”
The truth
Many modern lifetime mortgages allow voluntary repayments.
Depending on the lender and product, you may be able to:
- Pay some or all of the interest each month
- Make occasional capital repayments
- Arrange regular voluntary payments
- Repay a permitted percentage each year without an early repayment charge
Making payments may slow the growth of the mortgage and preserve more of the equity in your home.
Plans meeting current Equity Release Council standards must provide a facility to make voluntary payments without a charge, subject to the lender’s criteria.
The exact allowance, minimum payment and frequency will vary. Payments above the permitted amount could trigger an early repayment charge, so you should check the terms before paying.
Myth 6: “The Interest Rate Can Rise Whenever the Lender Wants”
The truth
Many lifetime mortgages have a fixed interest rate for each amount borrowed.
This means the rate applying to an advance does not normally change after that money has been released.
Where a lifetime mortgage has a variable interest rate, a plan meeting Equity Release Council product standards must have a lifetime cap or upper limit.
However, a fixed interest rate does not mean that the outstanding balance stays fixed. If interest is not paid, it is added to the mortgage. Future interest is then calculated on both the original borrowing and the interest previously added.
The amount owed can grow significantly over a long period. Your personalised illustration should show how the balance could develop over time.
Myth 7: “I Will Never Be Able to Move Home”
The truth
Many lifetime mortgages can be transferred to another suitable property.
This process is often called porting. The new home must meet the lender’s criteria at the time of the move.
The lender may consider:
- The value of the new property
- Its construction and condition
- The location and local market
- Whether it will provide acceptable security for the mortgage
- Any restrictions affecting the property
If you move to a less expensive property, you may need to repay part of the lifetime mortgage to maintain an acceptable loan-to-value level.
Some products provide downsizing protection after a qualifying period. This may allow the mortgage to be repaid without an early repayment charge if the new property is not acceptable to the lender. Conditions will apply.
Your future housing plans should be discussed before choosing a plan, particularly if you expect to move into sheltered accommodation, a retirement development or a property of unusual construction.
Myth 8: “I Must Own My Home Outright”
The truth
You may still qualify if you have an existing mortgage.
However, any mortgage or other qualifying secured borrowing will normally need to be repaid when the lifetime mortgage completes.
This may be done using:
- Part of the equity-release funds
- Your savings or investments
- A combination of the released money and your own funds
Only the money remaining after the existing mortgage and any agreed costs have been paid will be available for your other plans.
If your main aim is to repay an existing residential or interest-only mortgage, your adviser should also consider whether another later-life mortgage could be suitable.
Myth 9: “Equity Release Can Only Be Used for Home Improvements”
The truth
The money can generally be used for a wide range of legal purposes.
Some homeowners use the funds to clear an existing residential mortgage.
The money could pay for repairs, adaptations, a new kitchen or improved energy efficiency.
Some people provide a living inheritance or help a relative with a property deposit.
Funds may be used for planned spending, travel, a replacement car or other later-life needs.
It may be possible to repay unsecured debts, although this can increase the repayment period and overall cost.
Some homeowners consider property wealth when planning for care or home adaptations.
Using equity release to repay short-term debt requires particular care. It can turn borrowing that may have been repaid over a few years into a long-term debt secured against your home.
If you give money to family members, you should also consider the effect on your own future needs and seek tax or legal advice where appropriate.
Myth 10: “Taking the Maximum Lump Sum Is Always Best”
The truth
Borrowing more than you need could result in unnecessary interest.
With a lump-sum lifetime mortgage, interest will normally be charged on the whole amount from the day it is released.
A drawdown lifetime mortgage allows you to take a smaller initial amount and keep an agreed reserve for possible future withdrawals.
Interest is normally charged only on money that has been released, so drawdown may reduce the total borrowing cost when the full amount is not needed immediately.
Future withdrawals may be subject to minimum amounts, lender availability and a different interest rate from the rate applying to the original release.
Your adviser should help you consider how much you need now, what you may need later and whether holding borrowed money in savings is likely to be worthwhile.
Myth 11: “The Money Is Tax-Free, So It Cannot Affect Anything Else”
The truth
The initial money is normally received as a loan rather than income, but there can still be wider consequences.
Receiving equity-release funds could affect your finances in several ways:
- Money held in your bank account could affect entitlement to means-tested benefits
- Interest earned on savings may be taxable
- Investing the money may create taxable income or gains
- Gifts to family members could have inheritance-tax implications
- Giving money away may be considered in a future care-fee assessment
- Releasing money now leaves less property wealth available for later needs
The tax treatment will depend on what you do with the funds and your personal circumstances.
Before proceeding, your adviser should consider whether your benefits could be affected and recommend specialist tax or legal advice where necessary.
Myth 12: “Equity Release Is My Only Option”
The truth
Equity release is only one of several possible later-life financial options.
Depending on your circumstances, alternatives may include:
Selling and moving to a less expensive home could release money without creating mortgage interest.
Savings or investments may meet some or all of the cost without securing a new loan against your home.
You normally pay the interest each month, subject to affordability and lender criteria.
Some lenders offer repayment mortgages with higher maximum ages or alternative term criteria.
You may qualify for financial support or help with eligible home adaptations.
A relative may be able to help, although everyone should consider the legal and financial implications.
The FCA has previously highlighted the importance of advisers considering a customer’s individual circumstances and discussing suitable alternatives.
Good advice should not begin with the assumption that equity release is automatically the right answer.
The Biggest Myth: “Equity Release Is Completely Risk-Free”
Modern lifetime mortgages may provide valuable consumer protections and greater flexibility than older products, but equity release is not risk-free.
Potential disadvantages include:
- Compound interest can cause the balance to increase significantly
- The value of your estate will normally be reduced
- Your entitlement to means-tested benefits could be affected
- Early repayment charges may apply
- The plan may restrict which properties you can move to
- Advice, legal, valuation or arrangement fees may be payable
- Future borrowing may be limited
- Money released now will not be available for a different need later
You should receive a personalised illustration showing the interest rate, fees and projected balance. Read it carefully and ask questions about anything you do not understand.
Equity Release Council Protections Explained
The Equity Release Council is a trade body rather than the financial regulator. However, products meeting its standards provide protections that go beyond the basic regulatory requirements.
Neither you nor your estate should owe more than the eligible net sale proceeds when the conditions are met.
You have the right to remain in your home for life or until you move permanently into care, subject to the plan terms.
Interest must be fixed for each release or, where variable, subject to an upper limit for the life of the loan.
You have the right to move the plan to another acceptable property, subject to the lender’s criteria.
The plan must provide a facility to make payments without charge, subject to lender criteria.
Customers taking out equity release through Council members must receive independent legal advice.
Do not assume that every feature applies to every lifetime mortgage. Your adviser should confirm whether the recommended lender and product meet Equity Release Council standards.
Questions to Ask an Equity Release Adviser
Before choosing a lifetime mortgage, ask your adviser to explain the recommendation in plain English.
Ask why equity release is considered more suitable than downsizing, savings or another mortgage.
Ask to see the estimated amount owed after 10, 15 and 20 years.
Confirm the annual allowance, minimum payment and any possible charges.
Ask what property types could be refused and whether downsizing protection is included.
Ask how different borrowing amounts and repayment choices could affect your estate.
Make sure your current and possible future means-tested benefits are considered.
Ask about advice, arrangement, valuation, legal and possible early repayment charges.
Understand whether the adviser considers the whole market or a limited panel.
How My Later Life Can Help
At My Later Life, we believe equity release should be explained clearly and without pressure.
Our advisers take the time to understand why you are considering releasing money, what you want to achieve and how the decision could affect your future.
We can discuss lifetime mortgages alongside possible alternatives, explain the costs and risks and help you understand the features available from suitable lenders.
Where equity release is appropriate, we will explain why. Where another option may be more suitable, we will discuss that with you.
You are not required to make an immediate decision. You should have enough time to review the recommendation, speak to your family if you wish and ask further questions.
Equity Release Myth Buster FAQs
Does the lender own my house after equity release?
Not with a lifetime mortgage. You remain the legal owner of your property, although the lender places a legal charge against it. A home reversion plan is different because you sell some or all of the property to the provider.
Can I lose my home with a lifetime mortgage?
You normally have the right to remain in your property for life or until you move permanently into long-term care, provided you follow the conditions of the mortgage. These usually include maintaining and insuring the home and using it as your main residence.
Can my family inherit equity-release debt?
A plan meeting Equity Release Council product standards includes a no negative equity guarantee. Provided the relevant conditions are met, your estate should not owe more than the eligible net sale proceeds of the property.
Will equity release reduce my children’s inheritance?
Yes, it will normally reduce the value of your estate because the loan and any unpaid interest are repaid from the property. The amount remaining will depend on the borrowing, interest, repayments, property value and length of the plan.
Can I pay the interest on a lifetime mortgage?
Many plans allow you to make voluntary payments, including regular interest payments or occasional capital repayments. The allowances and conditions vary between lenders.
Can I move home after taking equity release?
Many lifetime mortgages can be transferred to another property, subject to the new home meeting the lender’s criteria. You may need to repay part of the loan if you move to a less expensive property.
Can I repay equity release early?
You can usually repay a lifetime mortgage early, but an early repayment charge may apply. The charge and any exemptions should be explained before you proceed.
Is equity-release money tax-free?
The initial funds are normally received as a loan rather than taxable income. However, saving, investing or giving away the money may have tax, benefit, care-fee or estate-planning consequences.
Does equity release affect Pension Credit or other benefits?
It can. Money retained as savings may affect entitlement to means-tested benefits. Your benefits position should be checked before you release funds.
How old do I need to be?
Lifetime mortgages are commonly available from age 55, although minimum ages and other eligibility requirements vary. For a joint application, lenders will normally consider the age of the youngest applicant.
Do I need to own my home outright?
Not necessarily. You may qualify if you have an existing mortgage, but it will normally need to be repaid when the lifetime mortgage completes.
Is equity release right for everyone?
No. Equity release may be suitable for some homeowners and unsuitable for others. Your income, benefits, property, family, future plans and alternative sources of money should all be considered.
Still Have Questions About Equity Release?
Speak to a qualified adviser about the myths, facts, costs and alternatives. We will explain your options clearly and give you time to decide whether equity release is right for you.
Call 0207 100 4255 Explore Your OptionsFinal Word
Equity release is neither a quick fix nor something that should automatically be avoided.
Modern lifetime mortgages may provide useful features, such as fixed interest rates, voluntary repayments, drawdown facilities, inheritance protection and the ability to move the mortgage to another suitable property.
However, the cost can be significant, particularly when interest is allowed to compound over many years. Equity release can also reduce your inheritance, affect means-tested benefits and limit some of your future choices.
The most important step is to base your decision on accurate information rather than outdated assumptions.
At My Later Life, we can help you understand the facts, compare the available options and consider whether a lifetime mortgage fits your circumstances and plans.
Written By Simon Oliver Equity release specalist and FCA regestered FCA Number: SXO00162
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N.B. “This is a lifetime mortgage. To understand the features and risks, please ask for a personalised illustration. Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt, seek independent advice.”
