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The Outcome of an Equity Release Mortgage on Owner Death

Uncover a detailed guide to how an equity release loan is repaid when the property owner passes away.

The Outcome of an Equity Release Mortgage on Owner Death

Equity release mortgages allow you to borrow potentially large cash lump sums against your property equity without making instalments throughout retirement.

The loan product works by rolling up interest into the debt balance, with the lender selling the property when you die or move into a long-term care facility.

Often, literature about equity release brushes over the repayment information, but you must understand what happens if you pass away with an open equity release product secured against your home.

How Does Equity Release Work When I Die?

Normally, the lender will sell the property if you die or enter into care - i.e. you no longer need your home to live in.

The sale proceeds are used to repay:

  • Estate agent charges.
  • Legal fees.
  • The equity release balance.

Anything left is passed to your estate and can be shared between heirs as directed in your will.

Most modern equity release schemes have a negative equity guarantee. Even if the accumulated interest is now more than the property value, your beneficiaries cannot inherit this debt.

Instead, the lender first pays the solicitor and estate agent and settles the balance with the remaining sale proceeds.

Managing an Estate: Equity Release Explained for Beneficiaries

Once a homeowner with an equity release loan dies, their beneficiaries (or trustees) need to work through a few steps to finalise the sale.

Repayments in Equity Release Explained

When the loan holder (or the second surviving partner) dies or goes into care, the equity release lender needs to be repaid within a finite time frame.

Those deadlines are included in the equity release agreement and will be around 12 months.

That period allows beneficiaries a little leeway to see if there are other ways to repay the debt without selling the property.

For example, they might opt to sell other inherited assets, collect investment returns or cash in pension benefits to pay back the equity release loan.

How Does Equity Release Work if the Beneficiaries Don't Want to Sell?

Most equity release loans are settled through a property sale, but alternatives depend on the available finances.

One option is for the heirs to repay the debt themselves or perhaps cash in funds from elsewhere in the estate if they wish to keep the property.

Home reversion plans are the exception to the rule and an older, less flexible and less popular type of equity release loan.

If a homeowner takes out a home reversion plan, they sell some or all of their property equity to the provider in exchange for a lump-sum cash payment.

In these scenarios, the lender automatically owns the property and will sell it onward.

Guidance From Equity Release Advisers for Surviving Partners

Several rules and regulations apply to equity release loans, as specified by the Equity Release Council - including what happens if one borrower dies and a surviving partner still lives in the property.

Provided you have taken out an equity release loan from a respected lender who participates in the scheme, a second partner has a lifelong entitlement to live in their property.

Equity Release Interest Rates and Inheritance Tax

Equity release has a bearing on inheritance tax. In effect, cash borrowed is a loan, not a form of income or earnings, so it isn't subject to income tax.

Beneficiaries normally pay a reduced inheritance tax bill because the property's value will be less (if partially inherited) or zero (if no sales proceeds remain).

The pitfall is that your heirs normally won't be able to inherit your property, as they would if you had a regular mortgage outstanding on the residence.

Independent Advice From the Leading Equity Release Advisers

If you're managing an equity release mortgage repayment, want to refinance debt, or need to understand the repercussions for your future beneficiaries, please contact the Revolution Finance Brokers team.

We can answer all your queries about the nuts and bolts of an equity release repayment, so you are in a position to make informed decisions.

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