What happens to equity release on death
Equity release is growing in popularity, as more people consider unlocking the money tied up in their homes. If you’re looking into this, or you’re looking after the financial affairs of someone who’s died with a plan in place, you’ll probably want to understand what happens to equity release on death.
Here we explain what will need to be done to pay off the lifetime mortgage and what else you should bear in mind, such as the potential impact on your partner or beneficiaries.
How equity release works when you die
If your lifetime mortgage is in joint names and you die first, it won’t need to be repaid until your spouse or partner dies. If it is in your name only or you outlive your partner, it will need to be repaid on your death.
Most equity release providers give up to 12 months for the plan to be repaid, although some allow more time. Most often, the mortgage and accrued interest is paid through the sale of your home, although it does not have to be. Once your home is sold and your lender has been repaid in full, the money left over (if any) will be given to your beneficiaries according to your will.
Please be aware that the interest on a lifetime mortgage will continue to roll up until it is paid off, so the amount owed will increase even after your death.
However, if your mortgage lender is an Equity Release Council member, you benefit from a No Negative Equity Guarantee, which means the repayment amount will never be more than the sale value of your home. Equally, if the sale proceeds are not enough to fully repay the loan, the lender will absorb the loss, so no one will be liable for the outstanding debt.
Equity release and probate
Your next of kin will need to inform your equity release lender of your death. They will need a copy of the death certificate, your plan number, and details of your chosen executors. Your lender will then contact the executors to establish how they intend to repay the loan from your estate.
Your executors will be free to decide how the loan is repaid as long as it is done within the lender’s time frame. For example, they could decide to keep your property as an investment and repay the loan from other assets in your estate.
If they decide to sell your home, your lender will request to be kept informed on progress, so that they can help ensure the sale is completed and the loan repaid within the required timeframe.
Once the lifetime mortgage has been paid off, your lender will no longer have a charge on the property and the land registry records will be updated to reflect this.
How your partner could be affected
If your lifetime mortgage is in joint names, your spouse or partner can continue to live in your home until they die, or move into long-term care, at which point the loan plus interest will need to be repaid.
If your lifetime mortgage has a cash reserve you draw on when you need to, any money still in this pot when you die could help fund your partner’s future.
If your partner decides to downsize, they could move the lifetime mortgage to their new property as long as it meets the lender’s criteria. If they decide to repay the loan, they could incur an early repayment charge, but this will depend on the terms of your lifetime mortgage.
It’s important to know that if your partner lives with you but is not named on your equity release plan, they will have no right to stay in the property when you die. So, if for any reason, the two of you have not applied in joint names, it’s worth considering what the unnamed person would do if the plan holder were to die first.
Equity release and inheritance
By its nature, an equity release lifetime mortgage will reduce the value of your estate, because you are borrowing money that must be repaid with accrued interest when you die or move permanently into long term care.
If your home has grown significantly in value, there may be cash left over from the sale to leave to your beneficiaries. However, if your home is your biggest asset and it sells for roughly the same or less than the amount owed on your lifetime mortgage, there could be little if anything, to leave as an inheritance.
There are lifetime mortgages with features that can help you leave as much as possible as an inheritance, while still enjoying the benefits of equity release, including:
- Inheritance Protection allows you to ringfence a percentage your home’s value to leave as an inheritance.
- Drawdown facility allows you to hold cash in reserve and only draw on it when you need it. You don’t pay interest on the money in your cash reserve, so the less you use the less will have to be repaid, and the more you can leave to loved ones.
- Interest repayment allows you to repay a percentage of the interest either on a regular or ad hoc basis without incurring an early repayment charge, so you can reduce the amount needing to be repaid when you die.
Also, if you feel you have more than enough money to maintain your lifestyle, you could consider giving money to family members or friends now as a ‘living inheritance’. However, you should get advice from a financial adviser to understand the tax implications of doing this.
Equity release and your will
When you take out a lifetime mortgage, you should also review your will to check whether anything in it will be affected.
This is particularly important if you have bequeathed your home or any cash lump sums based on the value of your home. If so, you should reword your will accordingly, such as changing your bequest from a specific amount of cash to a percentage of any remaining equity instead.
If you’re yet to write your will, releasing equity from your home could present a great opportunity to get it sorted and ensure your loved ones clear on your wishes.
To discuss any aspect of equity release in more detail call 0800 368 8466 for a free initial consultation with the UK’s leading independent experts, Age Partnership.
Or to find out how much equity you could release from your home, use our free and easy to use calculator.
You should seek professional advice before deciding whether equity release is right for you. Take the time to fully understand how equity release works and what you’re committing to, consider possible alternatives, and talk your thinking through with your family.
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