Equity Release can be confusing if you don’t know how it works and what it means for your property. Home ownership, eligibility, and what happens after you pass away are all elements you will want to learn more about before you start thinking about taking out a plan.
A Lifetime Mortgage, the most popular Equity Release plan, allows you to retain ownership of your home even though the loan is secured against it. Home Reversion, another type of Equity Release, is slightly different in that you will sell part or all of your home to the reversion company, in the understanding that you can remain living there for the rest of your life.
The main differences between a Lifetime Mortgage and a Retirement Interest-Only Mortgage (RIO) is the repayment criteria and what happens if you stop paying a RIO. With the former, the amount borrowed plus interest needs to be repaid after you die or enter long-term care, whereas with the latter, you will need to make monthly payments on the amount you have borrowed.
Therefore, only the amount borrowed would need to be repaid after you die or enter long-term care, however if you do not make payments, your home could be at risk from repossession. Whereas a Lifetime Mortgage with Equity Release Council safeguards, gives you guaranteed rights of occupancy whilst it remains your main home.
There are a few reasons why you might be unable take out an Equity Release plan, including:
– The property not meeting the right criteria: this might be the location, type of property, condition of the property, or the type of construction.
– How you plan to spend the money released: providers need to be aware of their responsible lending obligations, which means that if you plan to invest the cash you have released on something considered high-risk (e.g., cryptocurrency), you may be refused.
– Hidden bad credit: although you can get an Equity Release plan with bad credit, you should disclose things like bankruptcy, County Court Judgements, or debt management plans so your adviser has all the pertinent information to help you.
Essentially, Equity Release will reduce the value of your estate, so if IHT may be payable when you die, it can result in a lower amount. Any IHT payable is worked out by adding up all your assets, minus the liabilities associated with the estate. So, after your Equity Release loan is paid, the IHT will be calculated on the remaining amount. There are a number of allowances and conditions that need to be considered and IHT advice should be sought from a specialist adviser.
It is worth looking into a Potentially Exempt Transfer (PET), which is an unlimited value gift exempt from IHT provided the giver survives for the following seven years. If they do not survive the sliding scale of the seven year period, then some or all of the PET becomes a Chargeable Consideration, and is added to the value of the estate.
When the last borrower has passed away, the loan will need to be repaid if it is a lifetime mortgage. This means both the original loan amount and any interest that has compounded over time. Most providers will allow up to 12 months to pay back the loan, however this depends entirely on the lender and the type of plan that was taken out. It is down to the Executor of the estate to make the payment, which usually tends to come from the sale of the home or children, beneficiaries can pay off the lifetime mortgage and keep the property. With a home reversion plan, the company will organise the property to be sold at current market value and any percentage not owned paid to the beneficiaries.