Equity Release When Someone Dies
Equity Release schemes can be a great way for older borrowers to free up tax free money for their retirement. However, understandably, people often worry about what happens to the plan after they pass away. Two of the main concerns are to do with whether surviving partners can continue to live in the house and how the beneficiaries will go about paying back the loan.
This article will go over these concerns along with several other commonly asked questions about their equity release plan when someone dies.
Topics that you will find covered on this page
What is equity release?
Equity release is a way for people in retirement to access a lump sum of tax free cash from the money tied up in their property. There are two main types of equity release plan.
The first is a Home Reversion Scheme, in which the homeowner sells a share or the entirety of their house to a lender for a cash lump sum and, in return, gets to live in their house rent free until the end of their life.
The second and more common form of equity release plan is a lifetime mortgage. With a lifetime mortgage, homeowners are able to take out a significant loan secured against their property. Instead of needing monthly payments, equity release works by only paying back the loan when the borrower has passed away or moved into long term care, at which point the costs are recouped out of the sale of the property.
You will be able to continue living in your house as usual, as long as you pick a plan that is regulated by the Financial Conduct Authority.
What happens to your equity release plan when you die?
The idea behind an equity release plan is that nothing has to be paid back until you die or move into long term care. Exactly what happens will depend on the type of plan that you have gone for.
If you are on a lifetime mortgage, the first thing to happen will be that your beneficiaries need to inform your equity release lender. With lifetime mortgages, they will usually have twelve months after your death in which to repay the money that you borrowed.
Usually, this is done through the sale of the property, however, we will look into the different options later on. If there are any remaining proceeds from the estate after repaying the plan, then this can form part of the inheritance for your beneficiaries. Sometimes the money left over can also go towards funeral costs.
For this reason, some people like to make regular interest repayments on their lifetime mortgage so that the interest does not accumulate throughout the term of the plan and the value of the estate is kept largely stable.
What if I am using a home reversion scheme?
If you have used a home reversion scheme, the situation will be slightly different to lifetime mortgages. In this kind of equity release plan, the homeowner sells some or all of their house to a provider in exchange for a tax free cash sum. They are then able to remain living in the house rent free for the rest of their life.
In this case, since the house technically was technically sold at the commencement of the plan, ownership simply reverts to the lender. The lender can only take the share of value that they purchased in the deal.
In some cases, people will choose to ‘ring fence’ a percentage of the property value to be handed down in their will. In these cases, this percentage will be safe from being taken by the equity release provider.
There are a number of different equity release products to choose from so if you are thinking about releasing equity, contact a mortgage advisor to make sure that you are taking out the best equity release scheme for you.
What steps do my beneficiaries need to take when I die?
What happens when you die depends on whether or not you are the last remaining plan holder. If your partner is named on the plan and survives you, your beneficiaries do not need to act straight away.
If you are the sole borrower, your beneficiaries will need to contact the equity release provider as soon as possible after you pass away. You will most likely have been given a reference number when you took out the plan, and this should have been kept safe somewhere for use by your beneficiaries on your death.
As soon as is practicable, your beneficiaries should contact the mortgage lender and quote the reference number to let the lender know of your recent passing. This should have the effect of halting the interest and effectively ending the plan. They will also need a copy of the death certificate when they contact the lenders.
How quickly must the plan be repaid after my death?
Once the last borrower has passed on, the plan will end, and the money borrowed will need to be repaid, either through the property sale or through alternative means.
The total amount needing to be repaid will be the original figure borrowed plus any interest accrued and not been paid for the duration of the plan.
Since the amount borrowed is usually paid back following the sale of the house, your beneficiaries will usually be given twelve months after the death to repay the money owed. This may vary between different equity release lenders so you should double check the terms of your plan when you take it out.
You should also make sure that you will not be paid any early repayment fees following the death of the last plan holder.
"Equity Release schemes can be a great way for older borrowers to free up tax free money for their retirement. However, understandably, people often worry about what happens to the plan after they pass away."
What is a no negative equity guarantee?
If you buy an equity release product from an approved lender from the Equity Release Council, you will be protected by something called a ‘no negative equity guarantee‘. This is very important when it comes to safeguarding the finances of your beneficiaries.
What it means is that you will never owe more than the value of your property. This means that you will not be passing on equity release mortgage debt to future generations as they will always be able to pay back the equity release loan from the sale proceeds.
This is why most equity release providers will survey your home to accurately understand its value and why it is important that you don’t have any other outstanding balance secured against your home.
What is a protected equity guarantee?
If you are concerned about the amount that your beneficiaries will inherit, you can look out for a feature known as a ‘protected equity guarantee’. This allows you to ring fence a percentage of your home’s value to ensure that this amount is safely passed on to those named in your will.
You should keep in mind that the value in question is the value at point of sale rather than value at the point of taking out the plan. Therefore, if the property value rises or falls while the plan is in effect, so too will the value of the ring-fenced amount.
Can I pay back my equity release plan before I die?
Some people wonder whether it is possible to pay back their equity release plans before they die or move into long term care. This is certainly possible but you should be aware that considerable early repayment charges may apply.
These will vary depending on which equity release product you opt for, so if you think that you might wish to pay off your plan early, check which mortgages are most suitable for this purpose. Some may even allow you to sell the home and pay off the mortgage without having to pay any penalties.
What happens if house prices fall and the lender is owed more than my property is worth?
The answer to this question lies in the ‘no negative equity’ feature previously mentioned. If you have taken out a lifetime mortgage which is regulated by the Equity Release Council and Financial Conduct Authority, then your beneficiaries will never owe more money than your property is worth. This is to prevent mortgage debt being passed down through the generations.
If the situation does arise that your outstanding debt owed is greater than the value of your property, your lender will likely have an insurance plan in place to cover themselves. As for your beneficiaries, they will have to pay the entire value of the property, and they will unfortunately not be left with anything else to inherit.
It might be worth looking at protected equity schemes if you are concerned about the amount that your beneficiaries will inherit from your estate after your death.
What happens if I have a joint lifetime mortgage and my partner dies?
One of the main concerns that people have with equity release plans is what happens to the surviving party when their partner dies.
This is why it is important to think about taking out a joint equity release plan with your partner to protect them in this event. Repayment is only due when the last homeowner on the deed has died or entered long term care. Therefore if you have taken out a lifetime mortgage in joint names, your surviving partner will be able to continue living in the home until the end of their life.
One the last surviving plan holder dies, only then will the lifetime mortgage debt need to be repaid.
What happens if I die and my partner is not on the mortgage plan?
If your partner is not on the mortgage plan, however, they will face more of an issue. The debt will be due to be repaid so your partner may be forced to sell the house and move somewhere else after your death.
Usually, if they can see that two people are living together as a couple, most lenders will push for a joint mortgage to avoid this problem. It is recommended to speak to a mortgage advisor or financial adviser to make sure that your partner’s future is secure.
What happens if I move full time into a care home?
What happens when you move into a care home will depend on whether or not you are on a joint plan. Moving full time into a care home will also result in the plan coming to an end. If your equity loan is in joint names, the surviving partner will be able to continue to live in the home until they too move into long term care, or pass on.
If the property is sold to repay the debt and you have some surplus left over, this money can be used to fund the care costs.
Does interest stop when I die?
Interest should stop accumulating when the final homeowner dies, and the plan is considered to have ended.
For this reason, it is recommended for your beneficiaries to inform the equity release company of your death as soon as possible.
If you are concerned about how much interest will accumulate on your loan, you can talk to qualified advisors to understand more about how much you will end up owing your provider. There is such a thing as an equity release calculator but these only offer estimates rather than anything more exact.
What if my beneficiaries don’t want to sell?
Most equity release plans are settled through money raised from the house sale proceeds but this is not compulsory. If your beneficiaries have enough money to pay off the debt in some other way, then they can do this and keep the house.
Sometimes your executor will be able to find the funds from other assets in your estate or this could be topped up by contributions from your beneficiaries’ own money.
Keep in mind that this will be different if you have taken out a home reversion scheme, as in this case, the property has already been sold to the lender. However, your beneficiaries could always buy the house back through standard routes, such as using an estate agent.
How does equity release affect inheritance tax?
People often wonder about the link between equity release and inheritance tax. By choosing to release equity in your property, you are essentially reducing the value of your estate.
While, in some ways, releasing equity reduces the inheritance that you are leaving behind to your beneficiaries, it could also potentially benefit them. The inheritance tax threshold is currently set at £325,000 and is taxed at 40%. Therefore if you reduced the value of your estate to below £325,000, this would remove the liability to pay inheritance tax.
You are also entitled to give away the money released from the property to whoever you choose, and as long as you do not die within seven years of gifting it, this too will be free from inheritance tax.
What if I want to move house?
All lenders approved and regulated by the Financial Conduct Authority offer transferable lifetime mortgages, which means that if you want to move house while on the plan, you can do so and transfer the plan to the new property.
The lender will have to check that the new property is functional as security against the equity release loan.
What happens if my equity release provider goes under?
It is possible that your equity release provider can stop operating. In this case, it is likely that your product will be sold on to another provider, and they will take over your plan. The terms will have to stay the exact same as they were with your previous lender.
Therefore, you can have significant confidence in your plan, regardless of the success of your provider.
Article author
Katy Davies
I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch. I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.
Outside of work, I love the snow and am a keen snowboarder. Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.
Email – [email protected]
Frequently Asked Questions
What is equity release?
Equity release is a way for people in retirement to access a lump sum of tax free cash from the money tied up in their property. There are two main types of equity release plan.
What happens to your equity release plan when you die?
The idea behind an equity release plan is that nothing has to be paid back until you die or move into long term care. Exactly what happens will depend on the type of plan that you have gone for.
What happens if I die and my partner is not on the mortgage plan?
If your partner is not on the mortgage plan, however, they will face more of an issue. The debt will be due to be repaid so your partner may be forced to sell the house and move somewhere else after your death.
What if I want to move house?
All lenders approved and regulated by the Financial Conduct Authority offer transferable lifetime mortgages, which means that if you want to move house while on the plan, you can do so and transfer the plan to the new property.
The lender will have to check that the new property is functional as security against the equity release loan.
