Debunking myths about equity release
- Credit: Getty Images/iStockphoto
In these days of instant, ether-fuelled opinion, refuting a misconception born of either lazy, ill-researched ‘reporting’ or a misreading of the facts can be challenging.
Moreover, like a stubborn, fast-growing garden weed, it doesn’t take long for a misunderstanding to take root and spread its confusing conclusions wherever it’s allowed.
The world of consumer finance is laden with examples of myths that have their origin in misinterpretation or a simple misreading of the facts. Let me give you a handful of examples.
Myth: You should avoid using credit cards at all costs because they’re expensive.
Truth: If you’re disciplined and repay any outstanding balance on the card every month, you will not pay any interest. In addition, most card providers offer cardholders attractive reward programs.
Myth: Your expenses will be much lower when you retire.
Truth: You don’t receive a free pass for groceries, utilities, home and/or car insurance when you finish work. Furthermore, healthcare costs are likely to rise.
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Myth: You can save for retirement later and live for today.
Truth: Yes, you can. But the longer you leave it, the less money you will have.
Myth: Money can’t buy happiness.
Truth: Okay. This is a bit contentious, but I suspect that thousands of readers would be interested to see if they could handle a major Lottery win without sinking into deep despair.
It’s fair to say that one area of consumer finance that has suffered from repeated misinterpretation is equity release.
Despite its burgeoning popularity among homeowners aged 55 and above, the equity release process is misunderstood by a surprisingly large number of people who comment upon and write about it. As a consequence, the process has become mired in ambiguous commentary and erroneous interpretations that can confuse consumers. Here are a few such examples.
Myth: The equity release industry is inherently risky and not properly regulated.
Truth: In fact, the industry is regulated by the Financial Conduct Authority (FCA), the UK’s financial watchdog whose role includes protecting consumers. All equity release companies, providers and brokers, including advisers, must adhere to FCA standards. In addition, responsible lenders and brokers are also members of the Equity Release Council (ERC), the industry’s trade body, and must observe its strict code of practice.
Myth: If you release equity from your home, you cannot leave an inheritance.
Truth: Many equity release products enable you to leave an inheritance. For instance, applying an ‘Inheritance Guarantee’ to your lifetime mortgage (the most popular equity release plan) ensures you protect a percentage of your property’s eventual sale value for you or your loved ones. Alternatively, you can make regular or ad-hoc repayments, thereby maintaining or actively reducing the outstanding loan balance.
Myth: Lifetime mortgages are expensive.
Truth: Interest rates have fallen markedly over the past few years with many plans now offering interest rates under 3%, significantly lower than the standard variable rates charged by the ‘big six’ banks on traditional residential mortgages. In addition, lifetime mortgage rates are fixed for life, which means you’ll know exactly how much you’ll have to repay when your plan ends.
Myth: It’s impossible to repay an equity release lifetime mortgage.
Truth: The majority of lifetime mortgages now come with fixed term early repayment charges, which ensures that at some point in the future, your plan can be repaid, penalty free. There are also several ways by which you can actively manage or reduce the interest accruing on your plan while it is in place.
Myth: Eventually, an outstanding lifetime mortgage will grow to exceed the property’s value.
Truth: All lenders who are members of the ERC (see above) offer products that include a ‘No Negative Equity Guarantee’. This means that when your property is sold, your loved ones will not be called upon to pay any shortfall. Should your property sell for more than the amount you’ve borrowed against it, the remaining balance belongs to your beneficiaries.
Does this debunking exercise mean that equity release is the greatest thing since sliced bread? Of course not. It’s not suitable for everyone, but it has become an increasingly mainstream product capable of improving the finances of many older homeowners.
One final point regarding perhaps the most common misconception about equity release needs to be confirmed: you maintain 100 percent ownership of your home and also have the freedom to move house, subject to the lender’s criteria, should you require.
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