Equity release, which often relates to lifetime mortgages, can be an ideal financial solution for certain members of society. However, the process of arranging an equity release loan is quite different to that of a standard mortgage. Unlike standard loans that have an initial product term, which is either variable or fixed for a short period of time, lifetime mortgage products generally have an interest rate that is fixed for life.
In this guide we explain what happens to the equity release plan when you die or move into long term care and what arrangements will need to be made, which should help you to understand whether this is the best financial option for your circumstances.
How does equity release work?
Equity release allows property owners to use the equity that has built up in their property to take out a lump sum as a loan, or to take regular payments, or they can choose a plan that does both. The loan is secured against the property and when the homeowner moves into long-term care or passes away, the loan is repaid, including the interest that has accrued.
Equity release money can be used for all types of purposes, from making home improvements, to going on holidays or providing family with financial support. Some people choose to have regular payments to cover living expenses after they retire and no longer have a working income.
Equity release products are only available to people aged over 55 (some lenders only offer to 60+) and usually the mortgage on the property will need to have been paid off, or almost paid off.
The earlier that you take out an equity release plan, the more it is likely to cost, because the interest will build up over a longer period. For example, if you take it out at 55 and live to be 85, you would be paying 30 years of interest. Taking an equity release plan out at 70 and living until 85 would be half the time, therefore would cost significantly less when the loan needs to be repaid in the event of your death.
With some equity release products, you have the option to pay off the interest if you would prefer to do so, which would generally mean that your beneficiaries will receive more inheritance.
There are two main types of equity release plans:
Lifetime mortgages are the most common types of equity release plan. The way this works is you take out a loan against your property and when you die, the loan and interest accrued must be paid off. In most cases, the property will be sold in order to pay the lender the amount owed, but other arrangements could be made, such as the beneficiary using their own finances to pay it off and retain the property themselves.
Home reversion plans
With a home reversion plan, the lender owns part or all of the property in exchange for the loan. With this type of equity release, the property will be sold when the last occupant dies. This will generally happen quite quickly, so any family members would be required to clear all possessions from the home before it is sold.
What happens to my equity release plan when I die?
When you die, your home may be sold so that the equity release plan can be paid back. The sale will usually be arranged by the executor of the will, who will also arrange for the equity release plan to be repaid, both the capital and interest accrued. They will also be responsible for arranging services such as the estate agents and solicitors, and will be required to pay for these services, using the proceeds from the house sale.
If there is any money left over from the sale after these costs have been paid, the rest of the money will go to the beneficiaries in your will.
For anyone thinking about taking out an equity release product, it is a good idea to discuss the situation with the executor of the will, so that they are aware of what they would be required to do when you die. You should also provide them with the details of the plan, including the reference number and the lender, so that they can provide it to them easily to arrange the repayment.
When does my equity release plan need to be paid back?
Generally, the lender will require that the equity release plan is repaid within a year of your death, although this could be sooner depending on the type of plan you have chosen. Following your death, the executor of the will should contact the lender to arrange the next steps of selling the property and the deadlines for making the repayment. The time period will vary depending on the lender – some allow up to three years to repay the equity release loan following the death, but some allow much less.
Does my home need to be sold to pay off my equity release plan?
If you have taken out a home reversion equity release plan then the property must be sold, as part of it, or all of it, will be owned by the lender when you take the loan out. However, with a lifetime mortgage, there is more flexibility for your beneficiaries. If they want to keep the property, they could arrange to pay the owed sum to the lender using other finances, either from your estate or through their own means.
How will it affect my surviving partner?
If you live with your partner, you should always take the plan out in joint names so that there is an agreement that the survivor can continue to live in the property. If it is only in your name, the lender could insist that the property is sold and your partner would need to move out.
What if we move into long term care?
If you move into long term care and have no surviving partner, or you both move into long term care, the plan comes to an end and the property must be sold to repay the money owed.
If just one of the two joint plan holders moves into long term care, then the other partner can continue living in the property. Once they die or move into long term care, the property would be required to get sold to repay the plan.
The repayment of equity release is due upon death of the last plan holder, or that person moving into long-term care, whichever scenario happens first.
What is a protected equity guarantee?
One of the drawbacks of taking out equity release is that beneficiaries may lose out financially in some inheritance, as the cost of the equity release plan is repaid from the sale of the property, before the beneficiaries receive anything.
However, people taking out equity release are able to ‘ring-fence’ a set amount of money that their beneficiary will inherit, so that they know they will definitely receive the specified minimum amount of inheritance, regardless of when the plan comes to an end.
Equity release and inheritance tax
There are numerous reasons why people choose to take out an equity release plan, including that they will not be required to pay any monthly payments, like you would when you take out a standard loan.
Another key benefit of choosing equity release over other financial products is that you can reduce the amount of inheritance tax that is paid to HMRC when you die. Inheritance is taxed by 40% on the part of the estate that is over the threshold, so in some cases equity release allows a reduction of the tax paid to the government.
Some people decide to take out a lump sum in the form of equity release, so that they can financially assist their loved ones while they are still alive, rather than waiting to receive inheritance when they die.
This way, they get to see how the money helps their family, whether it is for a deposit on a home, home improvements or even taking a family holiday together to make memories.
Will my beneficiaries need to consult a financial adviser?
While it is not compulsory to consult an adviser, it will certainly be beneficial to do so. Some of the benefits include:
As well as the fact that your beneficiaries will be coming to terms with your passing, they may not be familiar with how equity release works or what responsibilities they may have. A financial adviser will be able to explain everything to them, breaking down any complicated terminology and making sure they are aware of any requirements, such as arranging the sale of the house and the repayment of the equity release plan.
Switch to a different plan
A surviving partner may need the services of a financial adviser because they might be able to move onto a different plan after their partner dies, which gives them a better interest rate and more flexibility.
A surviving partner may need to access more money from equity release following their partner’s death, especially if their income has reduced. A financial adviser will be able to review the available products that they could switch to and find the one that is the best option.
Transfer to a new property
Another consideration for a surviving partner is whether they want to downsize and move to a smaller property following the death of their partner. With some plans, it is not possible to switch the plan to a new property, so using a financial adviser can help in this situation to change the plan, if necessary. This should enable the surviving partner to have the option to move into a smaller home and transfer the plan to the new property, or repay the plan from the sale of the bigger property, if that is their preferred solution.
Check for any available financial support
A surviving partner may also be due more financial support, such as extra pension credits or reductions to council tax. A financial adviser will be able to look at the full financial picture following the change of circumstances, and they should be able to help ensure that the surviving partner knows about all of the extra financial support that could be available.
The financial adviser will know if they qualify for additional benefits and how they can apply for what they are entitled to and also make sure that any change of equity release plan will not affect their benefits.
Covering funeral costs
If there is still some money available from the original plan, it could be possible to access money to pay for the funeral costs when the other person passes away.
Can I pay back my equity release plan before I die?
The simple answer is yes, you are able to pay back your equity release plan before you die, although there could be an early repayment charge. You should always check before you take out a financial product if there is an early repayment charge, as this could cause problems further down the line for you.
The amount of the early repayment charge varies between lenders, so you will find some that are not too expensive but there are some that will end up costing more than if you just keep the plan in place.
Is equity release the best option for me and my family?
While taking out equity release is a good option for many people, you would need to decide what your main priorities are. People often do not give much consideration about what happens on death and the numerous actions that would be required to be completed by the executor of the will.
It is difficult to calculate how much an equity release plan will end up costing, so if you are worried about not leaving your beneficiaries as much money as you would like to, this might not be the best product to choose. Alternatively, you can choose a plan where you are able to ring-fence a minimum amount of money to be paid to beneficiaries when you die.
The other factor that you should be considering is whether you are happy for the executor of the will to make all of the arrangements for repaying the equity release plan, including arranging the sale of the house, possibly in a short turnaround.
As well as having a lot of actions to undertake, the executor of the will may be dealing with grief when they are required to take all of the actions involved in arranging the repayment, so you should speak to them in advance of taking out your equity plan to ensure they understand with the equity release what happens on death.
Boon Brokers can help to find you the right financial product to meet your needs and to make sure that you are able to take care of your family in the way that you want to. Speak to an impartial expert on equity release, to discuss whether it is the right option for your family.
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.