The myths and misunderstandings about Equity Release: 2020 update

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

Equity Release went through something of a revolution in 2019 as demand increased and providers introduced new features, greater flexibility and better pricing. The Equity Release Council announced their new standards framework, which came into force on 1st January 2020. As we enter the new decade, we have more product choice than ever before, and higher levels of consumer protection, but there is still a great deal of misunderstanding and misinformation about these products.

David Forsdyke, our Equity Release expert at Knight Frank Finance, answers some of the most common questions:

• Will I lose control of my home or be forced to move out?

No. Under the Equity Release Council’s product standards you have the right to remain in your property for the rest of your life, or until you need to move out into long term care. With a Lifetime Mortgage (the most common form of Equity Release) you still own your home and the property title is still in your name.

• Will I be stuck in my current property forever?

No. One of the Equity Release Council’s four product standards is that you have the right to move your lifetime mortgage to a new property, as long as the new property is acceptable to your provider. This means you can take out a lifetime mortgage on your larger family home now, but then downsize to a smaller house, or flat, in the future. Some lenders have taken this a step further and offer ‘downsizing protection’ so that if the new property doesn’t meet their criteria they won’t charge you any penalty for repaying the mortgage in full.

• It's expensive, isn’t it?

The cost of Equity Release depends on your age and the amount of equity you want to take out of your property. Last year we saw interest rates on Lifetime Mortgages fall as low as 2.7%, and there are many products available below 3%. These rates are typically fixed for life, and that is likely to be 15 years or more for the average Equity Release customer (average age is around 70). In my humble opinion, a mortgage with a 15 year fixed rate at 3% is extremely good value! Interest rates are higher if you want to release a lot of your equity, but that doesn’t mean it’s expensive if it allows you to meet your goals.

• Will compounding interest mean I have a really big debt in the future?

First of all you don’t have to let the interest compound, or ‘roll up’ on top of the loan if you don’t want to. You can choose to pay some or all of the interest each month, or you could repay some of the money you’ve borrowed whenever you have some surplus funds. Many products allow you to repay around 10% of your loan each year without charges or penalties. If you do allow the interest to roll up on top of the loan then it will double in size in 24 years if the interest rate is 3%, 18 years at 4%, or 15 years at 5%.

• Equity Release is only for those who are desperate or ‘in a squeeze’

This is not true. 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 crystallising their pensions*, or as part of their Inheritance Tax planning*.

• Is it safe?

With the Equity Release Council’s new standards framework now in force, the Equity Release market is safer today than it has ever been. All providers have signed up to the Council’s four product standards. The FCA’s regulations make sure your adviser is properly qualified to give you advice, gives you the knowledge and information you need, and informs you of all the pros and cons. It may be that Equity Release is not the right solution for you. One of our strengths at Knight Frank is that we have access to the broadest range of property finance, which ensures we find the most appropriate solution for your needs and circumstances.

David Forsdyke has 25 years' experience in financial services, including six years with the industry regulator (the Financial Conduct Authority) and two years as a member of the Equity Release Council’s Standards Board. David leads the Later Life Team at Knight Frank Finance. For more information, visit our Borrowing into Retirement page.

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