IF you’re looking to supplement your income in later life, equity release may be an option. But what happens to your plan when you die?
Equity release can come in two forms, either as a lifetime mortgage or a home reversion plan.
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The most common form of equity release is a lifetime mortgage, which is a loan secured against your property.
Whereas a home reversion plan allows homeowners to sell a portion of their home in exchange for a lump sum or a regular income, while still living there, typically rent-free.
While structured differently, these types of equity release do share a few characteristics.
For example, it’s only available to homeowners over a certain age, the money you receive is tax free, and the plan finishes when the last person dies or moves into long-term care, at which point any outstanding balance would be repaid.
That means taking out equity release will reduce the value of your estate – or in other words, it will leave less for an inheritance to your loved ones.
So, below we explain what happens when your plan comes to an end.
How does equity release work when you die or move into long-term care?
Usually, for a lifetime mortgage, your home will need to be sold, and the proceeds from that sale will be used to repay any outstanding debt. This is the original capital borrowed plus any rolled-up interest.
Similarly, for home reversion plans, the provider will be repaid when you die.
But since these lenders own all or a portion of your home, the amount they’ll be repaid depends on the percentage they own and the sale price of the property.
So if your home has increased in value, the provider will benefit from the increase when your property is sold.
Companies that are members of the Equity Release Council need to adhere to a strict set of rules, one of which states that plans come with a No Negative Equity Guarantee.
This means your estate will never owe more than your property is worth when it is sold.
This is an important feature if you’re considering a lifetime mortgage.
That’s because if your home is sold after your death and it’s worth less than your outstanding balance, your family won’t be required to make up the shortfall.
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Will my partner need to repay my lifetime mortgage when I die?
Lifetime mortgages can be sold as joint policies, and in these instances, your surviving partner can continue to live in your home until they either die or move into long-term care.
The plan will stay in place; however, the interest will continue to roll up.
Some lenders do allow a “Significant Life Event exemption” clause in your plan, which means you have the option to repay the mortgage without incurring early repayment charges if your spouse dies first.
If it’s not a joint policy with your partner, then they’ll have the option to repay the outstanding balance or sell the home and move elsewhere.
If you find a new partner after taking out equity release, then speak to an equity release advisor about adding them to your policy.
Dangers of equity release
EQUITY release can be a good way to unlock cash in retirement – but there are some dangers to consider, according to The Sun’s Tara Evans.
Interest rates on lifetime mortgages are around 5.5%, with some topping 8%. This means they can be more expensive than a traditional mortgage and you should always consider downsizing first.
You could end up owing more than you borrowed, although it will never be more than the value of your home.
Using equity release to take cash from your home will reduce the assets you have to pass on to loved ones when you die.
It is a long-term commitment and you may be charged an early redemption fee that can be as high as 25% if you want to pay it off.
Be aware that equity release could affect or stop your benefits.
Always seek advice from a qualified equity release adviser.
What happens if I move into full-time care?
If the last policyholder moves into full-time care, then your equity release plan will need to be repaid.
Once your home is sold and the proceeds are used to repay the lender, you can use the remaining balance to fund your care.
If you don’t have enough to afford the care you need, then you’ll need to get in touch with your local authorities to investigate funding options.
How long is there to repay the equity release lender after death?
Equity release providers normally require the final bill to be settled no more than 12 months after your death.
Your lender expects that the money released and any accrued interest will be repaid through the sale of your home, so it naturally allows time to market and negotiate the sale of the property.
If the sale of your home is taking longer than expected, and whoever handles your estate is afraid of missing the deadline, they will need to get in touch with your lender to discuss options.
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Does equity release interest stop on death?
No, interest will continue to be charged on a lifetime mortgage until the outstanding balance is repaid to your lender.
Will my house need to be sold to pay back my lifetime mortgage?
In some instances, your beneficiary may decide they want to inherit your home and, as such, they would need to repay the outstanding balance via alternative means.
However, this option will need to be discussed with your lender.
Will there be any money left for inheritance?
If leaving behind an inheritance for your loved ones is important, you can ring-fence a percentage of the equity in your home to be passed on to your beneficiaries when you pass away.
In effect, this makes your home less valuable to your lender, and it does reduce the amount you can borrow.
If this is important to you, make sure that your adviser knows to include it as a feature of your plan. Without it, the amount that is passed on to your beneficiaries will be impacted.
What happens if house prices fall?
A fall in house prices isn’t good news for anyone with an equity release plan.
For a lifetime mortgage, the amount you owe your lender doesn’t change in line with any change in the house price. This means that after you have repaid the lender, if the house price has fallen, there will be less equity left over for your beneficiaries.
For home reversion plans, things are different. If the house price falls, the percentage of equity in the home that you and the lender own will both drop in value.
Can equity release be paid back before death?
Equity release can be repaid early. Some plans allow you to make voluntary payments to stop the roll-up of interest and repay some of the capital; however, payments are subject to certain limits.
Early repayment charges may apply above a set value, so if you do decide to repay the plan early, it’s important to factor those charges into your decision.
Sometimes, continuing to keep up with the interest repayments and repaying the outstanding balance when moving to long-term care or when you die is a better solution for you.
Speak to Age Partnership about your later life lending
Advice is required before proceeding with equity release.
Age Partnership can help you find out more and if it could be right for your circumstances.
Through their service, initial advice is provided for free and without obligation. Only if your case completes would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply.
You should be aware that equity release requires paying off any existing mortgage. It will also reduce the value of your estate and impact funding for long-term care.
Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority.
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