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.
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:
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.
Once a homeowner with an equity release loan dies, their beneficiaries (or trustees) need to work through a few steps to finalise the sale.
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.
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.
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 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.
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.
Depending on the terms of your equity release loan, you might be able to settle the debt early and leave your home to your heirs in its entirety.
Much depends on the clauses within your equity release agreement and how long you have held the product.
Some lenders allow you to repay the loan, with all the accumulated interest, from five years - although others will charge an early repayment fee if you wish to settle the account at any stage.
If you have taken out an equity release plan with a guarantee against negative equity (as required by the Equity Release Council), there is no risk that your heirs will be asked to pay a debt.
Even if the property value has fallen, or you have lived a long time and accumulated a substantial interest debt, the lender cannot recoup more than the property is worth.
An inheritance guarantee, or protected equity guarantee, is a feature offered in some lifetime mortgages.
You can ring-fence a proportion of your property value, which is secured and will be passed to your beneficiaries regardless of how much the final debt is worth.
For example, you might borrow 30% of your property value and have a 50% inheritance guarantee. When you die, and the property is sold, your heirs get 50% of the sale value no matter how much interest has accrued on the 30% borrowed.
These protections apply to the property value when you die or go into care - it isn't fixed at a rate when you first take out the equity release mortgage.
A home worth £500,000 with a 50% inheritance guarantee might be worth, say, £750,000 in 15 years. Your heirs still have a protected proportion of 50%, so the inheritance is £375,000.
Yes, suppose your beneficiaries have the financial means to settle the equity release loan balance (or there is enough money within your estate).
In that case, they can arrange a repayment rather than allowing the property to be sold.
Equity release mortgages aren't sold or marketed as a product you might choose solely because of a reduction in inheritance tax.
Still, there are secondary considerations that may influence your decisions.
When you release equity, you're reducing the property value you own, in effect.
If that ownership value falls below the inheritance tax threshold, your heirs may not have any tax liability to pay whatsoever.
Another element is that you can give cash gifts to your family members when alive and won't attract inheritance tax provided you live for at least seven years from the date of the cash gift.
Therefore, you might take out an equity release loan and give your beneficiaries some of the cash lump sum without any inheritance tax liability.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.
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