Equity release is typically considered for the here and now – helping over 55’s across the UK reach financial freedom and enjoy their retirement the way they plan. But what happens to equity release when you die?
Our equity release specialists have put together everything you might need to know about what happens to equity release on death and what this will mean for your estate.
Understanding Equity Release
Equity release plans allow homeowners aged 55+ access the equity stored in their home in the form of a tax-free lump sum or a drawdown facility to access at a later date.
The two main types of equity release products are lifetime mortgages and home reversion plans, each offering their own pros and cons.
Lifetime mortgages
A lifetime mortgage is a loan secured against your home that is intended to be repaid, in addition to any interest, when you pass away or move into long-term care. The type of equity release product you choose can significantly impact your estate and the inheritance you leave behind.
Home reversion plans
In comparison, a home reversion plan involves selling part or all of your home to a provider at a discounted rate, which will then be re-claimed when you pass away or move into long-term care at market value.
What happens to equity release on death?
Equity release mortgages are intended to be repaid when you pass away or move into long-term care. This is often through the sale of your home, which will allow the equity release provider to reclaim the amount they are owed from your estate. Understanding how equity release mortgages work when you die is crucial for effective estate planning.
Once your executor has settled the loan with your equity release lender, they will be able use any extra funds to distribute as stated by your will.
Repaying the Equity Release Lender
When the last applicant on your plan passes away, or moves into long term care, your provider will need to be informed so they can start the process settling the loan. The lender will then request any documents they require from the executor of the estate; this could include a copy of your original death certificate and probate documents.
If you have a lifetime mortgage, once the lender has received the documents they require, they will issue a letter to the executor of your estate to discuss balance of the loan, including how much interest has accrued, and how this will be settled. The executor of your estate will then have a specified timeframe, sometimes around 12 months, to settle the loan, whether this be through the sale of the property, other funds in your estate, or beneficiaries of the property raising a mortgage to repay the equity release. The equity release plan continues to accrue interest after your death until the plan is repaid. The money that remains after the lender is repaid will be shared as stated in your will or according to the rules of intestacy.
On the other hand, if you have a home reversion plan your equity release provider will sell the property on your estate’s behalf. If you have sold less than 100% of your property to your provider, upon sale they will issue the money relating to the percentage of the property not sold to your estate so it can be distributed as specified in your will, or according to the rules of intestacy.
If your beneficiaries wish to reclaim ownership of your home after you pass away, they may be able to settle the amount owed to your provider through self-funding options, for example using their existing savings or taking out a mortgage, or a buy to let mortgage, to cover what is owed. It is important they seek financial advice to understand their options in full.
When you are exploring equity release as an option, your equity release adviser will discuss how equity release will impact the inheritance you leave to your estate and, if you choose to do so, how you can protect some of this.
Timeframe for repayment of your equity release plan
The timeframe for repaying an equity release plan varies depending on the type of plan and the lender.
Typically, for a lifetime mortgage, the executor of the estate has up to 12 months to repay the loan after the last remaining applicant’s death. During this period, interest continues to accrue on the outstanding balance.
If the equity release plan is a home reversion plan, the property is usually sold shortly after the homeowner’s death by the provider on your estate’s behalf. The proceeds from the sale will then be distributed according to the percentages owned by the provider and your estate. The exact timeframe can vary, so it’s important to check the specific terms of your equity release plan with your provider.
Repaying a joint equity release plan
If you take out a joint plan with surviving partners, you will only need to repay your plan when the last applicant passes away or moves into long-term care.
If your partner is not named on your equity release plan they will be required to move out when the property is sold at the end of your equity release plan. Your equity release adviser will discuss this in detail and may recommend legal advice where applicable.
Learn more about equity release and joint ownership, alternatively our advisers are on hand to answer any questions you might have.
How joint and individual equity release plans differ
Joint and individual equity release plans differ significantly in how they are repaid when one of the plan holders dies.
With a joint equity release plan, if a partner dies the surviving partner can continue to live in the property until they either pass away or move into long-term care. The equity release plan is only repaid after the last remaining plan holder has died or moved into long-term care.
In contrast, with an individual plan, the equity release loan must be repaid when the sole plan holder dies or moves into long-term care. This distinction is crucial for couples considering equity release, as it affects the surviving partner’s ability to remain in the home.
What happens if I have a protected equity guarantee
Also known as ring-fencing, a protected equity guarantee sets aside a predetermined percentage of your home’s equity for your beneficiaries that will not be touched by your equity release plan.
This means when you pass away or move into long term care, the amount your estate will need to repay to your lender will be limited as you have protected part of the property’s value for your beneficiaries.
Whilst a protected equity guarantee will impact how much you will be required to repay; this will also mean you will be limited on how much money you’re able to receive from the equity release plan.
How will a No-Negative-Equity Guarantee help me?
A no-negative-equity guarantee is part of the Equity Release Council’s standards and is on all plans recommended by members of the Equity Release Council. The no-negative equity ensures that the cost of the repayment will never exceed the value of your home, and your estate will never be required to repay more than your properties value.
This helps to make sure after you pass away, your beneficiaries are not responsible for additional costs after you’ve died.
At Bower Home Finance, we’re proud members of the Equity Release Council and will only recommend plans that meet their standards, including a no negative equity guarantee.
Moving into Long-Term Care
If one applicant moves into full-time care, the other can continue living in the home until they also pass away or move into full-time care. However, if you are the only remaining applicant, or a solo applicant, your estate will be required to repay your equity release plan when you move into long-term care.
If you wish to still receive care but do not wish to move into a care home, care in your home may be an option you could consider. In home care (domiciliary care) will not affect your equity release plan and you will not be required to repay it unless you move into a care home or die.
Many people across the UK choose to use an equity release plan to fund domiciliary care so they can remain comfortable in the home they love.
Inheritance Tax and Equity Release
Equity release can affect the amount of inheritance tax your estate will need to pay. Inheritance Tax (IHT) is calculated based on the size of your estate and by proceeding with an equity release plan, the value of your property, and estate, will be reduced.
Learn more about inheritance tax and equity release.
Speak to an equity release specialist today
While you’ll mostly get to enjoy the benefits of your plan, it’s worth thinking about what happens to the plan after you die, especially if you’re still weighing up different plan types.
Our independent equity release specialists are here to discuss in detail how equity release works when you die and how it can affect your beneficiaries.
Get started today with our free online equity release calculator.
