Equity release after death: repayment and estate responsibilities

Are you curious about equity release and what happens after death? You've come to the right place. This article can help you to:

• Learn what equity release really is.
• Understand the two types of equity release plans.
• Find out what happens to your equity release if you or your partner pass away.
• Discover how equity release can affect the probate process.
• Learn if and when your equity release loan can be repaid before death.

We know that equity release can seem tricky to navigate. But rest assured, we’ve got you covered. MoneyNerd is here to guide you through every step, making the process less daunting.

We’ll help you make sense of it all, so you can make the best choices for you and your loved ones. Let’s get started.

Equity release – what happens on death?

A lifetime mortgage usually becomes repayable when the last borrower dies or enters permanent care, subject to its terms. A surviving person who owns or lives in the home is not necessarily protected unless they are covered by the plan. See related guidance.

Once the property is sold, the equity release lender can request the money owed to them, but they cannot take anything more than their share. 

For example, if they have a 50% share of your property in a home reversion scheme, they cannot take more than 50% of the money from the property sale.

With a lifetime mortgage, the borrower retains ownership. A qualifying no-negative-equity guarantee can limit what the estate must repay from the property’s net sale proceeds when its conditions are met.

But what happens to my equity that you still own? If you have a home reversion plan and have opted to “ring-fence” a percentage of your property value for beneficiaries in your will, this percentage of the property remains theirs and cannot be taken by the equity release provider. 

What happens if your beneficiaries want to keep your property?

It’s sometimes possible to avoid the property being sold if the beneficiaries of the will would prefer to keep the property. They may be allowed to pay off the debt from other money within the estate, or even pay some of their own money into the estate to clear the debt and keep the house.

This is not always possible as there are inheritance implications that can come into play.

What happens if your plan provider goes bust?

On rare occasions, an equity release plan provider can go bust and stop operating. If this happens to your lender, you’re probably wondering what happens to your existing equity release plan. 

It’s highly likely that all equity release products will be sold to another provider and they will take over your plan. The new equity release provider will need to follow the terms of your existing plan precisely as you had agreed with the previous lender. 

Who repays the lender?

After the final borrower’s death, their personal representatives deal with the debt as part of administering the estate. On joint plans, the surviving borrower normally continues under the plan’s terms.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Once the home is sold from their estate, either lawyers or whoever is in charge of probate will be responsible for paying the lender the correct amount of money from the sale proceeds.  

It will be paid by the homeowner directly if they need to repay the loan because they have moved into long-term care. 

Why you might consider releasing equity

The most popular reason individuals and couples choose to release equity is to make retirement more comfortable. The money might help you with financial planning for retirement to help you retire early, tick things off your bucket list or even repay outstanding debts in later life. 

Another common reason for releasing equity is to give all or some of the money to a family member. In recent years, this is often done to help the family member buy their own property.

Also, studies found that over half of equity release customers use equity release to fund home improvement projects¹.

What happens if house prices fall?

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

If the outstanding balance exceeds the net sale proceeds, the effect depends on the plan’s no-negative-equity guarantee and whether its conditions have been met.

Where a valid no-negative-equity guarantee applies, the guaranteed shortfall is not ordinarily recovered from other estate assets or beneficiaries. Executors should obtain the lender’s written settlement terms.

This negative equity guarantee is one of the most attractive aspects of using an equity release plan. 

How much do you pay back on equity release?

The amount you pay back after using an equity release plan will depend on if you used a home reversion scheme or a lifetime mortgage. 

With a home reversion scheme, the company gets an amount equal to the share of the property they now own. For example, if they own 50% of the property, they will get 50% of the money raised from the sale of the property.

Home reversion does not charge loan interest because it is a sale. The provider receives the agreed ownership share when the home is sold; the purchase price is normally below open-market value to reflect continued occupation and the plan terms.

With a lifetime mortgage, the amount you pay back on your equity release plan will depend on three factors, namely:

1. The fixed interest rate you agreed to
2. The time elapsed between the start of the mortgage and when you die or go into long-term care
3. The amount of money released

Illustration only: £65,000 growing at 6.4% compounded annually without repayments would be about £137,000 after 12 years, excluding fees. Actual compounding, rates and repayments vary; check the guarantee terms separately.

Equity Release Comparison

We’ve put together this table to help you better understand the differences between a home reversion plan and a lifetime mortgage.

If you want to learn more about these equity release types and how they could affect your children’s inheritance, be sure to read our detailed guide.

Category	Home reversion plan	Lifetime mortgage
Ownership	You sell part or all of the home, usually for less than open-market value, and remain under the plan’s occupancy terms.	You retain ownership and borrow against the home.
Property value changes	The provider receives the agreed share of future sale proceeds; only any retained share belongs to your estate.	Sale value and the outstanding loan, interest and charges affect the amount left for your estate.
Inheritance	Selling a share reduces what you can leave; any protected share and conditions must be checked.	Rolled-up interest can reduce the remaining equity. Inheritance protection may be available under some plans.
Repayment	There is no loan to repay for the sold share; the provider receives its share when the property is sold under the plan.	Usually settled when the last borrower dies or moves permanently into care. Payment options and obligations vary.
Money received	A lump sum or income may be available, depending on the plan.	A lump sum or agreed drawdown reserve may be available; access remains subject to the plan terms.

Do you have to pay taxes?

A lifetime-mortgage advance is borrowed capital rather than taxable income. Income tax can apply to many other receipts, including pensions and savings income; it is not limited to wages or self-employment.

A home reversion involves selling property rights, so its tax treatment must be considered separately. Main-residence relief may be relevant. Obtain tax advice if the property or transaction has unusual features.

Any later income or gains from investing released money, and gifts made with it, can have their own tax consequences.

There is a possibility that releasing equity and gifting the money to someone can reduce inheritance tax (IHT). However, this is risky and might not be worth it overall. 

What’s the catch with equity release?

There is no ‘catch’ with equity release if you take the time to understand what an equity release plan is and what it is not. 

The FCA reports that many lifetime mortgages work well for consumers, especially those who couldn’t afford traditional mortgages or borrowing. However, some lifetime mortgages do not work out well for consumers, often because they weren’t informed enough before they applied.³

Obtain advice from an appropriately authorised and qualified equity-release adviser. Ask which providers and products they consider, their fees and any commercial ties; an adviser is not necessarily independent of every provider.

You should also check out the Equity Release Council website, which has lots of useful information about your rights. 

Compounding interest and the below-market price paid for a home-reversion share can make equity release costly. Compare the actual contract and projections; neither the provider’s profit nor future property values are guaranteed.

Some other risks of equity release include:

• The impact on means-tested benefits
• Your debt will increase due to interest
• You’re unable to take another loan against your property
• Fees associated with equity release

Does equity release interest stop on death?

Interest normally continues to accrue after death until the lifetime mortgage is repaid. Executors should notify the lender promptly, request a redemption figure and confirm the repayment deadline and any extension terms. The lender does not automatically own the home on the borrower’s death.

Any surviving joint borrower’s position depends on the contract. The estate should check the repayment period and occupancy arrangements rather than assume immediate vacation or an interest freeze.

Family, friends or beneficiaries will need to inform the equity release plan provider of the death and need to provide them with a death certificate.

How does it affect probate?

Equity release plans can slow probate down if it is the surviving spouse or partner who has died. This is because the process will need to ensure the debt is fully paid back from the sale of your property.

Overall, it makes probate slightly more complex, but liaising effectively with the equity release company can make things easier. Most lenders have dedicated teams to assist with the paperwork and formalities. 

Can it be paid in fu before death?

It is possible to pay back some or all of your total equity release debt before you die. 

When you have a lifetime mortgage, you can decide to pay off some or all of the interest while you are alive. This will reduce your overall debt when you pass away, leaving beneficiaries with a greater inheritance. 

You might choose to repay all the money owed and end your equity release plan. This is possible on some plans but may not be possible on others. If you do this though, the costs can be expensive. This is due to equity release lenders usually applying eye-watering early repayment charges for exiting the agreement early.

References

1. Legal & General – Equity Release
2. GOV.UK – Capital Gains Tax
3. FCA – Equity Release