_The myths and misunderstandings about Equity Release

Equity Release is becoming an important part of financial planning for older homeowners. Home improvements, repaying debts, helping younger family members, and reducing Inheritance Tax are just a few of the reasons why older clients are releasing the wealth built up in their homes.

Modern Equity Release products come with a host of consumer protection measures, including Equity Release Council standards and detailed regulations from the FCA. They are now cheaper than ever thanks to recent dramatic reductions in interest rates. But the term ‘Equity Release’ is not always understood.

Indeed, some members of the general public believe it to be expensive, unregulated or even ‘dodgy’ in some way. There were some poor value products around in the 1990s, but thankfully those are firmly consigned to the past. Here are the most common worries we hear:

• Homeownership: Will I lose control of my home or be forced to move out? With a Lifetime mortgage (the most common form of Equity Release) you still own your home, the property title is still in your name, and you can continue to make changes to your property as you wish. As with any type of mortgage, it’s important you look after your home and tell your lender if you plan to make any major changes. If you take out the less common form of Equity Release, known as Home Reversion, you will give up ownership of some or all of your property, but the provider has to give you a tenancy for the rest of your life (or until you move out permanently into care) which means they cannot throw you out.

• A last resort: Equity Release is for those who are desperate or ‘in a squeeze’. Equity Release is slowly entering the mainstream, and at Knight Frank Finance we have helped several very wealthy clients with Equity Release. They see property as a fundamental part of their financial planning, using it to make gifts to their children, or as a tax efficient alternative to crystalising their pensions*, or as part of their Inheritance Tax planning*.

• Leaving an inheritance: If I take out Equity Release, there won’t be anything left for my children and I could leave a debt behind. The good news is that Lifetime Mortgages taken through members of the Equity Release Council have a ‘no negative equity guarantee’ so you can never owe more than the value of the property. Interest rates are at an all-time low, so the effect of compounding interest (‘roll-up’) is greatly reduced. For example, the lowest rates currently available are below 3%, meaning a lifetime mortgage will take around 24 years to double in size. If property prices continue to rise at 1% each year and you borrowed 25% of your property’s value at the outset, your remaining equity would actually keep increasing. We would need to see property prices falling by over 3% each year over the next 20 years before you run out of equity!

If you have worries and would like to know more about Equity Release, speak to a member of our Later Life Finance team. All Later Life advisers are qualified in Equity Release and will take the time to explain how everything works. You can contact us on 0203 918 7259 or visit our Borrowing Into Retirement pages.

*Knight Frank Finance do not give pensions or Tax advice, but will work closely with our clients’ trusted advisers.