Equity Release and What Happens After Death – 2022 Rules
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Most of the concerns surrounding equity release plans are related to two things, either the rules about continuing to live in your home, and what happens to your plan when you die. In this free guide, we’ll be focusing on the latter.
We discuss some of the specifics about single and joint equity release schemes after death, including the equity guarantee, early repayment fees and the sale of the property from your estate. Read on to uncover exactly how your loan is repaid when you die or move into care.
What is equity release?
Equity release is a way for older homeowners to access a lump sum amount or recurring payment as a financial cushion in retirement, without ever having to make regular repayments. With some plans, there isn’t even any interest added.
It involves taking out a loan against a percentage or all of your main residence. This loan does not have to be repaid until your home is sold, which only has to happen once you die or if you move into long-term care.
You will continue to live in your property as normal and cannot be forced out, as long as you have chosen a plan that is regulated by the Financial Conduct Authority and the Equity Release Council.
To be eligible for an equity release plan, you will need to be of a minimum age, which can be anywhere between 55 and 65 depending on the lender. The older you are, the better loan deals you can usually get.
You’ll also need to own the main residence outright or only have a very small outstanding debt attached to the property. The value of your home may also be part of the strict criteria. Some lenders will not offer equity release plans to homes below a set value, around £75,000.
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The two types of equity release plan
To get a better understanding of equity release and what happens after death, you must first have a solid understanding of the two ways of releasing equity in the UK. It can be done through lifetime mortgages or by using home reversion plans.
#1: Lifetime mortgage
A lifetime mortgage is the opposite of a mortgage used to buy a home. The mortgage lender provides an outright homeowner with a lump sum amount of cash that does not need to be repaid through monthly payments. Instead, it is only repaid when your house is sold. The amount you release is charged with a fixed interest rate that continues to accumulate, increasing the total debt when it comes to selling the property.
With a lifetime mortgage, you can sometimes choose to make monthly interest repayments to reduce the total debt when you die or if/when the surviving homeowner moves into long-term care.
What happens if I have a joint lifetime mortgage and my partner dies?
Lifetime mortgages are often taken out by married or de facto couples who own a home together. When one of the couple passes away, nothing changes. The lifetime mortgage continues and the surviving partner can continue to live in their home without question. It is only once the surviving partner dies or moves into long-term care does the lifetime mortgage debt become payable.
#2: Home reversion scheme
A home reversion scheme is different to a lifetime mortgage because it doesn’t charge interest on your loan. Instead, the company ‘buys’ a proportion of your property for way under its actual value and waits until you die or move into long-term care to sell the home and hopefully make a profit. Expect to give up as much as 60% of your home for 20% of its value with one of these plans.
Equity release – what happens on death?
When you pass away and have no surviving spouse or partner who also owns your home, the equity release loan will need to be repaid. The money comes out of your estate through the sale of the property. 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. And if they own all of your property as part of a lifetime mortgage, and it sells for less than the total debt, they cannot take any more money from your estate, as per the negative equity guarantee (discussed in detail later!).
But, what happens to my equity that I 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 my beneficiaries want to keep my 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.
What happens if my equity release 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 on 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 equity release lender?
So, who repays the plan when I die? It is the last surviving partner – or the sole homeowner – who is responsible to repay the loan, which will come out of their estate.
As long as the equity release plan is governed by the Equity Release Council, in no circumstances will any beneficiaries have to pay from their own pocket. Although the amount of inheritance they will eventually receive will be reduced.
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 for 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 to 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.
What happens if house prices fall?
The equity release guarantee prevents equity release providers from asking for more money than what is raised through the sale of the house.
If house prices fall and the homeowner is in negative equity, meaning they owe more on the equity release loan than their property is worth, they do not have to pay anything more than the sale price. Anything else within the estate, such as savings, does not have to be used to repay the lender, nor do the beneficiaries of the will have to pay the lender the shortfall.
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. Because no interest is added, the amount owed is straightforward. However, these lenders will make significantly low offers to ensure profits even if the home value has decreased.
With a lifetime mortgage, the amount you pay back on your equity release plan will depend on three factors, namely:
- The fixed interest rate you agreed to
- The time elapsed between the start of the mortgage and when you die or go into long-term care
- The amount of money released
For example, taking out a lifetime mortgage of £65,000 at a fixed interest rate of 6.4% over 12 years would equate to a total debt of just below £137,000. Although your debt can accumulate fast, it’s important to remember that you can never owe more than the value of the property when the sale of your home is completed.
Do I have to pay tax on equity release?
The money you receive from equity release is not subject to income tax or Capital Gains Tax (CGT). Only money you receive from employment or income as a self-employed sole trader is subject to income tax. And Capital Gains Tax is applied to profits when you sell an asset, such as a home.
Of course, the former does not apply, but why do you not have to pay CGT on equity release? The answer is because you have not sold your property. Although it may feel like selling your property and continuing to live in it, what has actually happened is you have taken out a loan against some or all of the property. Money from loans is not subject to any UK tax.
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 is 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.
This is best achieved by completing independent research (yay – you’re doing it already!) and speaking with professional advisers that are authorised and regulated by the Financial Conduct Authority and not connected to the equity release provider in any way. You should also check out the Equity Release Council website, which has lots of useful information about your rights.
Some people perceive the ‘catch’ of equity release to be the significant interest added within some lifetime mortgages or the significantly low offers in home reversion schemes. Although these can seem unfair, lenders do this to protect themselves and to almost guarantee some degree of profit.
Does equity release interest stop on death?
The interest added to a lifetime mortgage stops being added when the final homeowner passes away. For example, if one homeowner dies but there is a surviving partner, interest will be added as normal. Only once the surviving partner dies does interest stop being added to the lifetime mortgage debt. At this point, the property will need to be vacated as it is owned by the equity release provider.
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 equity release affect probate?
Equity release plans can slow probate down if it is the surviving spouse or partner that 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 equity release be repaid 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.
Uncover more about equity release here!
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