While equity release can provide a welcome financial boost, it’s perfectly understandable to have questions about what happens to your equity release plan after you pass away.
This guide explains how equity release is typically handled upon your death, covering the repayment methods and important considerations for your family and beneficiaries.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
How equity release plans work
When you first look into equity release plans you will see that there are broadly two types:
- Lifetime mortgage
- Home reversion plan
These work in very different ways and so the amount and method of eventual repayment will be different.
It’s worth remembering that your plan can be repaid in various ways – not just through the sale of your home.
Lifetime mortgage
A lifetime mortgage is a secured loan that has an annual interest rate and the interest will be added to the amount you first borrowed.
As each year passes the amount owed grows larger, due to the added interest charges, this is known as compound interest.
Home reversion
A home reversion plan allows you to sell part or all of your home to a reversion plan company in exchange for a tax-free cash lump sum.
The percentage of your home that you have chosen to ‘sell’ will affect the eventual debt.
No repayments
Both types of plans allow you to borrow money without the requirement of monthly repayments.
The money that you receive from the plan will be free of tax (as it’s actually your money anyway).
Compound Interest
Compound interest means that interest is charged not just on the original loan amount, but also on the accumulated interest over time.
This can lead to the loan growing significantly over the years, especially if you live a long life after taking out the lifetime mortgage.
So how much will I owe?
This depends on the type of plan but understanding the basics of how the amount you owe increases over time is important for both lifetime mortgages and home reversion plans.
Lifetime mortgage
With lifetime mortgages, the interest on the original amount borrowed is not paid back during your lifetime. Instead, it compounds over time, meaning it’s added to your outstanding loan balance.
This happens each year.
Most lifetime mortgages will have a fixed rate of interest, so you can get an idea of how much is going to be charged. The lender will send you statements showing the balance owed and the interest added.
The longer you have this type of plan, the larger the debt.
Home reversion
When you sell a portion of your home through a home reversion plan, there are no interest charges to worry about. Therefore the debt you owe remains relatively predictable.
You will initially decide on a percentage of your home’s value to ‘sell’. This proportion of your home is then owned by the home reversion company.
When you die they will be looking to receive the same proportion of your property value.
So, if you first sold 40% of your property in exchange for a cash payment, the company will want 40% of the eventual sale value when you die.
Paying over the money
Your property sale will be handled by a conveyancer, who will receive the sale proceeds upon completion.
They are responsible for settling debts secured against your home, and will forward the required funds to your equity release provider.
Any surplus funds will go back to your estate (less the legal fees).
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When does the money need to be paid back?
In most cases, your equity release debt will need to be paid back within 12 months of your death.
For most people, the amount owed is usually paid back from the sale proceeds of the property. The lender understands that this will take time, so will generally allow 12 months for the sale to reach completion.
Lifetime mortgage: The full amount borrowed plus all the interest needs to be repaid. The loan will continue to be charged interest after your death, until it is eventually paid off.
Home reversion: When your property is sold, the home reversion provider will receive their agreed percentage of the final sale price.
Will my home have to be sold?
While most equity release plans are repaid from the sale of your home, there are often other options.
Lifetime mortgages are pretty straightforward and your executors could repay them from cash or savings, if preferable.
Home reversion plans, on the other hand, are a bit more complicated. This is because the provider is expecting a fixed share of the sale proceeds.
If this aspect is important to you then make sure you discuss it with your adviser.
Impact on Inheritance
Equity release directly affects the value of your estate and consequently, the potential inheritance you leave behind.
When you release equity from your home, you’re essentially taking a loan secured against its value.
Upon your death, the outstanding loan amount, including the accumulated interest, needs to be repaid, usually by selling your property. This means there is less money remaining in your estate to pass on to your chosen beneficiaries.
No negative equity guarantee
The no negative equity guarantee means that your beneficiaries will never be asked to pay more than the value of your property, even if the outstanding loan amount has grown larger than this over time.
The equity release provider takes on the risk if your property’s value declines over the life of the loan. This provides peace of mind knowing that your loved ones won’t be burdened with additional debt.
This important benefit is available from schemes that meet the Equity Release Council’s Product Standards.
Joint mortgages
Where you have a joint equity release plan, it will be set up with both of your names, allowing the surviving partner to continue living in their home.
There’s no need for any repayments at this point, or for the property to be sold.
You or your partner have the right to stay in your home until the last one of you dies or moves into long term care.
Some plans provide an opportunity to repay the debt at this point, without penalty charges. This is known as a significant life event exemption.
You will find more useful information in our article: Understanding Equity Release & Joint Ownership
Repaying your plan before death
You always have the ability to repay your equity release arrangement at any point.
But doing so is likely to incur early repayment charges, and these can be expensive.
Some providers may allow this to happen after certain significant events, like if a joint borrower dies or you are downsizing to a cheaper property.
Equity release advice
While this guide provides an overview of how plans work after your death, everyone’s situation is unique.
To truly understand the best course of action for you and your loved ones, it’s highly advisable to seek personalised guidance from a qualified financial adviser who specialises in equity release.
We can help you find a whole-of-market equity release specialist.
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