How Does Equity Release Work When You Die?

How Does Equity Release Work When You Die | April 2024

 

Equity release allows homeowners aged 55 and over to access the wealth tied up in their home. Consequently, people can tap into the value of their property, without needing to move.

This article will provide clarification on the process of equity release after you die, as this is often a point of confusion for many.

Table of Contents

Equity Release and Death

Equity release plans, such as lifetime mortgages, are designed to provide an extra source of income to homeowners during retirement.

Upon the plan holder’s death, the equity release lender is informed, typically by a family member or the estate executor.

Following this , the provider initiates the repayment process as outlined in the terms of the equity release plan. 

It is significant to note that all lifetime mortgages regulated by the Equity Release Council include a no negative equity guarantee. Consequently, the estate is not liable for any shortfall if the property is sold for less than the amount owed.

Homeowners considering equity release should thoroughly research different providers and products.

Remember that the terms, conditions and processes upon death can vary between different products and providers. Therefore, seeking professional financial and legal advice can help you to find the best plan according to your personal circumstances.

The equity release industry, regulated by the Equity Release Council, ensures that all processes are fair and transparent. Moreover, they provide guidelines on what happens when you die with equity release.

2. Immediate Effects on Equity Release After Death

When someone with an equity release plan dies, the repayment process comes into immediate effect. Typically, the equity release provider allows 12 months for repayment to be completed.

One form of repayment is through selling the property. Importantly, if the property is sold for a higher amount than the outstanding debt, the remaining money is distributed among the beneficiaries. This will be in accordance with the will of the person. 

During this period, the loan continues to accrue interest depending on the terms of the product. The interest accrued is added to the outstanding debt, and then repaid when the property is sold or the loan is settled. 

If the property is in joint names, and one partner dies, the equity release plan continues until the other partner dies. In such cases, the surviving partner can continue to live in the property until they die.

Settlement of Equity Release Death Debt

Settling debt after death in an equity release scenario involves several steps. The executor of the estate, or the surviving partner if the property was jointly owned, needs to inform the equity release lender about the death.

Once notified, the equity release provider will then calculate the outstanding debt. This calculation will include both the capital borrowed and accrued interest. 

Whilst this repayment is typically made by selling the property, other assets can also be used if preferred. Before the end of the plan term, it is important to check if any early repayment charges apply in the case of repayment. Consequently, consult a financial adviser if this is a potential concern.

Alternatively, with joint plans, the surviving homeowner can defer repayment until they pass away or enter long-term care.

Role of Executors in Equity Release Closure

Executors play a significant role in closing an equity release plan after death, as they are responsible for informing the equity release provider about the death and providing them with the original death certificate.

They also need to determine how the outstanding debt will be repaid, which may require seeking professional advice to aid this decision.

Furthermore, executors need to consider inheritance tax implications. As any money left after repaying the equity release loan becomes part of the estate, it may be subject to inheritance tax.

Executors must also ensure that the legal process is followed. They may need to apply for a probate document, giving them the legal right to deal with the deceased’s property, money, and assets.

Therefore, it is advisable that they seek professional legal advice regarding these matters.

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All equity release and mortgage advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

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Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

Impact on Inheritance and Beneficiaries

It is necessary to recognise the significant impact which equity release can have on inheritance. As the outstanding equity release loan is repaid by selling the property or other assets, this can reduce the amount inherited by the beneficiaries. 

However, most equity release providers offer an inheritance protection guarantee. This allows a percentage of the property’s value to be protected for beneficiaries, irrespective of how much is owed on the equity release loan.

However, full details of a product should be confirmed with providers before making a commitment to a particular product.

Although equity release can reduce the inheritance for beneficiaries, it provides financial freedom to the homeowners during their lifetime. Therefore, this is a trade-off that each party should carefully consider when discussing equity release options. 

The Role of Life Insurance in Equity Release

For helping cover the outstanding debt upon death, a life insurance policy can be crucial. This works to preserve the property and other assets for the beneficiaries. These payouts can then be used to repay the equity release loan, reducing the impact on the estate. 

Conversely, life insurance premiums can be expensive for older people. This means that seeking professional advice is necessary to understand whether this option is viable for all parties. 

The Role of Life Insurance in Equity Release

For helping cover the outstanding debt upon death, a life insurance policy can be crucial. This works to preserve the property and other assets for the beneficiaries. These payouts can then be used to repay the equity release loan, reducing the impact on the estate. 

Conversely, life insurance premiums can be expensive for older people. This means that seeking professional advice is necessary to understand whether this option is viable for all parties. 

"If the property's sale does not cover the outstanding equity release loan, any remaining debt will be paid off by the provider. Consequently, this guarantee ensures that beneficiaries are not left with outstanding debt after the plan holder's death. "

Handling Negative Equity upon Death

A significant advantage of equity release plans regulated by the Equity Release Council is the ‘no negative equity guarantee’. If the property’s sale does not cover the outstanding equity release loan, any remaining debt will be paid off by the provider. Consequently, this guarantee ensures that beneficiaries are not left with outstanding debt after the plan holder’s death. 

However, it means that if the property’s value has decreased significantly, little or no inheritance might be left after repaying the equity release loan. Furthermore, if the property is sold for more than the outstanding loan, the extra money goes to the estate. 

Equity Release Repayment Options After Death

The most common method of repaying equity release is to sell the property and use the proceeds to repay the loan. 

However, if beneficiaries wish to keep the property, they are able to repay the loan using other means. This may involve using funds from their own money, the estate, or a life insurance payout. 

It is important to remember that the equity release provider usually allows 12 months to repay the loan. During this time, interest on the loan will continue to accrue, meaning that this amount will need to be repaid on top of the loan. 

Legal Implications of Equity Release After Death

When dealing with equity release after death, there are several legal implications. For instance, repaying the outstanding loan is the legal responsibility of the estate executor.

If the property was owned jointly, and one partner dies, the surviving partner can continue to live there, and the loan must legally be repaid once the surviving partner dies or moves into long-term care.

There may also be inheritance tax implications to consider. Once the loan is repaid, any remaining money will become part of the estate, thus making it subject to inheritance tax.

Seeking Professional Advice on Post-Death Equity Release

When considering the complexities of equity release and the implications after death, seeking professional advice is advisable. This is because a financial adviser can guide the handling of the equity release loan upon death. 

They can also help understand the potential impact of inheritance and advise on ways to minimise this, such as through life insurance or an inheritance protection guarantee.

Although equity release can provide financial freedom during retirement, it’s important to understand how it works upon death.

By being informed, one can make the best decisions for their circumstances and ensure their loved ones are well cared for after they’re gone.

death and equity release

Equity Release and Selling Your Home

A common concern among those thinking about equity release is the terms and conditions surrounding selling your home with equity release.

Whilst equity release does not prevent you from selling your home, the sale proceeds must be used to repay the equity release loan. This is because the equity release mortgage is secured against the property. 

It is important to note that if you’re moving to a new property, most equity release providers will allow you to transfer your equity release plan, subject to the new property meeting the criteria set out by the provider. 

Importantly, if you sell your home and repay the equity release loan before the end of the plan term, early repayment charges may apply. This makes it crucial to check the terms and conditions of your plan if this is a potential cause of concern.

Equity Release and Inheritance Tax

When a person with an equity release plan dies, the value of their estate is reduced by the loan amount. In turn, this reduces the amount of inheritance tax that beneficiaries are liable to.  

However, you should also consider that equity release can reduce the amount of inheritance you leave behind. 

Professional advice regarding inheritance tax should be sought to understand these implications and how you may be able to minimise the impact of inheritance tax.

Timeframe for Equity Release

It is important to note that the timeframe for equity release can vary, depending on your circumstances and the type of equity release product you choose. On average, it takes 6-8 weeks from the initial application to receiving the money, although this is not guaranteed. 

Following this, the process involves several steps which include property valuation, legal work, and approval from the equity release company. Thus, 2-4 months is the average timeframe. Alternatively, it may take more or less time depending on your individual circumstances.

Monthly Payments and Equity Release

With a lifetime mortgage, there are typically no monthly payments. Instead, the interest accrues over time and is added to the loan.

This means that you do not have to account for monthly payments during your retirement income planning. However, for those who would prefer, there is the option to make monthly payments 

Interest rates on equity release plans can vary, so it is always worth seeking advice to find the best product and deals for your individual needs. 

Equity Release and Your Retirement Income

Equity release can be a valuable method for boosting your retirement income.

However, as releasing equity increases your household income, this will affect your eligibility for benefits, such as council tax reduction or extra pension credits. Before deciding to proceed with equity release, this is an essential consideration. 

On the other hand, the money from equity release can fund you to live comfortably during retirement. It can also provide you with enough money for home improvements, travel, or financially helping your family out. 

Once again, seek professional advice before deciding on equity release. This will guarantee that it’s the right choice for you, as well as helping you to fully understand the implications.

FAQ

What happens to equity release when someone dies?

When someone with an equity release plan dies, the equity release loan becomes due for repayment. If the property was owned jointly, the remaining plan holder (the surviving partner) is responsible for repaying the money owed. However, they can wait until they die or move into long term care to do so. 

Typically, the property will need to be sold in order to begin repayment. In this case, the equity release money borrowed and the accrued interest are repaid from the sale proceeds. If there is any remaining amount, it goes to the estate of the deceased. 

Most plans have a protected equity guarantee, ensuring that if the property’s sale does not cover the full debt, the beneficiaries are not liable to pay the remaining amount.

How does an early repayment charge affect equity release after death?

If the equity release loan is repaid before the end of the term, an early repayment charge is a fee which may be levied. The charge will vary depending on the terms of the equity release product, making it vital that beneficiaries are aware of the specific terms of their plan.

However, many equity release plans waive this charge in the case of death. This should be checked when initially setting up the plan.

Can equity release help cover funeral costs?

Yes, the money from equity release can help to cover funeral costs. Some people release equity to cover such expenses, helping to reduce the financial burden on their loved ones. 

Using an equity release calculator can provide you with an estimate of how much equity you could release from your property. This can be a helpful tool when planning for future expenses, including funeral costs.

How does joint equity release work?

Joint equity release works by allowing dual homeowners to release equity from their property with a joint plan. This plan will then continue until the last homeowner dies or moves into long-term care. Consequently, if one partner dies, the surviving spouse can continue living in the property.

Therefore, the loan and any interest accrued are repaid when the last homeowner dies or moves out. If the surviving spouse decides to move, they can transfer the plan to a new property, subject to the provider’s terms and conditions.

How does a buy-to-let mortgage work with equity release?

Some equity release products, known as buy-to-let lifetime mortgages, allow you to release equity from a property you rent out. Like a regular equity release plan, the loan and any interest accrued are repaid when you die or move into long-term care.

However, with a buy-to-let mortgage, the repayment typically comes from the sale of the rental property, rather than your main residence. This means that you can continue to live in your home while benefiting from the equity release.

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