In this article
Does equity release diminish inheritance?
Different types of equity release plan
Minimising your interest
Will my family inherit any debt?
The non-financial impact of equity release on your family
The benefits of equity release
Utilising downsizing protection
Is equity release the right option for you?
Equity release has become an increasingly popular product in recent years, but it once had a bad reputation for having the potential to leave a person’s family in an adverse situation. Historically, many people who took out an equity release product ended up with a poor outcome, such as being in negative equity, leaving their family responsible for repaying the debt.
These days, stricter regulations in the financial sector ensure that equity release providers are more accountable for preventing the negative situations that used to be commonplace.
However, due to the poor reputation in the past, many people still associate negative connotations with equity release and this can prevent them from taking out a financial product that would be suitable for them.
There are lots of myths about equity release that are slowly being broken down, as people learn more about the improved regulations and terms of the products that are on the market today.
One myth that people worry about is they will not be able to move home or that the accumulated debt could exceed the value of their property. Fortunately, most equity release products now have a no negative equity guarantee and you are able to take out downsizing protection to ensure you are able to move home.
Equity release diminishing inheritance
The biggest concern for most people when taking out equity release is the financial impact that it will have on their family when they inherit their estate.
In the case of a lifetime mortgage being secured against a property, what most commonly occurs is that the property is sold to repay the debt. Then, if there are any funds remaining from the sale once the loan has been repaid, they would be passed onto the beneficiaries. There is no option for the beneficiary to keep the property, unless they pay off the outstanding loan amount. Aside from sale of the property, an equity release lifetime mortgage is most commonly repaid from a re-mortgage or savings.
It is important to know that even if you allow the interest on your lifetime mortgage to compound, this does not guarantee that the equity in the property will diminish. If the property grows in value, which is known as inflation, at a higher rate than the interest rate of the lifetime mortgage, the equity in your property will grow instead of diminish. Therefore, you should discuss with an equity release broker, such as Boon Brokers, the property inflation rates of your local area to understand how your property’s value may increase in the future. However, even if property inflation has followed a particular trend historically, this does not mean that it will continue in the same vein in following years.
Different types of equity release plan
There are two main types of equity release plan and it is important to understand the details of both, so that you know how each one will affect your family.
A lifetime mortgage is the most common type of equity release plan, which is essentially a mortgage taken out and secured against your property. You still own the property, and you are able to continue living in the property until you die or move into permanent care accommodation.
If you are married or in a civil partnership, you can take out the mortgage in joint names. The benefit of doing this is that if one of you dies or goes into residential care, the other would be able to continue living in the property until they die or go into care accommodation.
As well as protecting your spouse by taking out a joint lifetime mortgage, you may also be concerned about the financial impact that an equity release plan will have on your children and/or grandchildren.
Some people choose to take out equity release to be able to provide some money to their family, for example, to put down a deposit on a house. In this scenario, it is worth having a discussion with your children to discuss how an equity release plan would affect their inheritance.
You may even want to involve your children in any consultation that you have with a financial adviser, if your main concern is how the plan will impact them. In some cases, taking out equity release will significantly reduce the amount of inheritance that beneficiaries receive. How much their inheritance is affected will mostly depend on how large the loan is and how much interest accrues over time.
With a lifetime mortgage, if you choose not to make interest payments, interest builds until you die or move into care accommodation. If this interest accumulation exceeds your property’s inflation, it will result in less inheritance for your beneficiaries.
There are some options that will help to ensure your children’s inheritance is less impacted. One choice, as mentioned, is to take out an interest payment plan, so that you are paying off the interest on the loan each month. Another option with equity release is to ringfence a certain amount of inheritance, so that you know they will definitely receive a certain amount.
No negative equity guarantee
As we mentioned earlier, a no negative equity guarantee will help to ensure that the situation does not arise where the outstanding loan is an amount higher than the value the property sells for.
All reputable lifetime mortgage providers should offer a no negative equity guarantee, so you should not have any trouble finding one who does. Depending on how much you borrow, the worst-case scenario for your family would be that you owe as much as the property is worth.
If you want to ensure that your equity release plan leaves as much inheritance as possible, the drawdown option can help you to minimise interest. A drawdown option is where you only release money when you need it, rather than choosing regular payments or an initial lump sum.
This is one of the reasons that many people choose the drawdown option, to have a better chance of leaving an inheritance to their family.
The other type of equity release plan is called home reversion. This is a more complicated arrangement than the lifetime mortgage plan, as you sell part, or all, of your home to the provider.
You are still able to remain living in your home until you die or move into residential care but in return for the benefit of this, the amount you receive will be significantly less than the property’s market value.
The key advantage of choosing a home reversion plan instead of a lifetime mortgage is that it enables you to ringfence an amount to ensure that your family receives the amount of inheritance intended for them. With the lifetime mortgage, it is not possible to accurately calculate how much inheritance will be left, as the interest accumulates until the date of death or moving into residential care.
Home reversion plans only account for 1% of the equity release market, indicating that it is much less attractive than the lifetime mortgage. Even though you are able to ringfence an amount of inheritance, your family is still likely to lose out financially due to them not benefitting from the true value of your property.
Will my family inherit debt?
Any company that is a member of the Equity Release Council must provide a no negative equity guarantee, which will protect your family and ensure that they do not inherit any debt.
There are some providers that are not part of the Equity Release Council that may not offer the guarantee, so it is important to check whether they are part of the ERC.
While your family will not inherit any debt when you use a reputable provider, they may have been expecting to receive some inheritance. In the event that the house sale is enough to pay off the loan but there is no money left over, this could upset your family, so you should carefully consider your choice.
However, taking out an equity release product is your personal choice and may be the best option for your circumstances, regardless of how it affects your family.
Non-financial impact of equity release on your family
You should also consider other ways that taking out an equity release plan will affect your family, as the executor of your will would have to make arrangements to sell your property. Therefore, it is a good idea to have a conversation with them so they know what to expect and what they will need to do upon your death.
Talking about your reasons for taking out equity release will help them to understand your choice. For example, rather than never knowing how their inheritance will benefit them, perhaps you want to see your beneficiaries benefit from their inheritance money whilst you are still alive if you decide to gift all/part of it to them. Or perhaps you want to enjoy luxurious holidays that you would otherwise be unable to have due to a lack of funds.
Maybe you want to enjoy the rest of your life without worrying about money. If you discuss your reasons with your beneficiaries, then your family will have less of a shock than if they were to find out at the reading of your will.
Discussing the benefits of equity release
Explaining to your family the main benefits of equity release can give them a better idea of your thought process. If you want to access the value in your home, usually the choice is between selling your property and downsizing, or taking out equity release. If you want to stay in your home and have the option to do so for the rest of your life, this is an important benefit to you.
Moving home can be stressful and you probably have an emotional attachment to your home. You will be familiar with your neighbourhood and may have a good local support network of friends, family and neighbours. If you move house to access the equity in your home, you would stand to lose all of that, unless you move to find a smaller property nearby.
When you have worked hard all your life to pay off your mortgage, you have earned the right to spend your money, including the equity in your home, however you choose to. Accessing the value in your home could allow you to have a better quality of life, rather than not being able to afford things that make you happy.
You might even be able to prolong your life by being happier, joining a gym, taking holidays or accessing private medical care that helps to improve your quality of life, for example.
If you choose a product with downsizing protection, you could have the best of both worlds. You could access the value in your property through a lifetime mortgage but later along the line, you could downsize. If the difference in the property sale and buying the new house covers the outstanding loan, you could then choose to repay it.
This way, your beneficiaries would still inherit your property, but it would be the smaller property that you moved into. In this situation, your family would not be required to sell the property after your death. They could keep it, or arrange the sale a few years later. They would have much more flexibility because there would be no loan secured against the property.
When you take out your equity release loan, one detail you should look out for is whether there is an early repayment charge. Just like with standard mortgages, many lifetime mortgages will apply an early repayment charge (ERC). So, in the scenario where you downsized and paid off your loan, you could be hit with a big financial penalty.
Your broker should be able to find you an equity release plan that offers you the most flexibility and security. The type of plan they should be able to find is one with a no negative equity guarantee and downsizing protection that allows you to sell your home without paying an ERC.
Circumstances can unexpectedly change and even if you do not think that you will need to downsize your property, you might need to, so having downsizing protection could turn out to be crucial.
Is equity release the right option?
There are many factors that determine whether equity release is the right choice for you and your family, and you should give the decision a great deal of consideration and seek expert advice. It is advisable to talk through your plans with your family if you are worried about how they will be affected.
Boon Brokers is a trustworthy fee-free broker who can help you to make this important decision by explaining all the pros and cons of taking out equity release and making sure that the terms suit your needs.
Our experience in the equity release market, as demonstrated by our Equity Release Council membership, will enable us to find you the right finance product for your needs and it may be that a different product is more suitable. We will discuss your current financial circumstances and work out the best way to access the finance you need. If your main priority is to try and protect your family’s inheritance, then we can find the best product to enable you to do that.
Contact us today for free, impartial advice on equity release plans and any other financial products you may be considering.
Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.