When you die, your equity release mortgage will need to be repaid; this is usually through the sale of your property, although there are other options available for paying back the loan. It also depends on other factors, including whether the loan is in single or joint names.
The following information will help you understand how equity release works when you die. How and when the loan is repaid, the impact it could have on inheritance tax and how you can be certain your family will never inherit any equity release debt.
What happens upon death?
Unless you choose to make monthly repayments, equity release is only paid back once you have died or moved into long-term care. Interest is added to the loan which is typically repaid from the sale of your home.
Upon death, your lender will need to be notified and sent a copy of the death certificate and the probate document. The lender will then contact the executors to discuss their plans for repaying the debt.
Once the executor has arranged the sale of your home and the solicitor and property agent have been paid from the proceeds of the sale, the lender will be repaid. Any remaining balance is added to your estate and distributed to beneficiaries as instructed in your will, or in line with the law if there is no will in place.
Does the property have to be sold to pay back the equity release loan?
Although paying back equity release is usually done through the sale of your property, there are other ways to repay a lifetime mortgage, which is the most popular type of equity release.
If your beneficiaries want to keep the property, perhaps as an investment, they could use savings or other assets to pay back the equity release loan. Alternatively, they could get a residential or buy to let mortgage if they are considering the rental potential of the property.
How long do you have to repay the equity release lender?
Most lifetime mortgage providers allow up to 12 months to pay back equity release but this will depend on the lender. They will liaise with the executor of the estate to see how the sale is progressing and may contact the estate agent to confirm the property is being marketed.
During this time, the loan will remain in place and continue to incur interest until the property has been sold.
What happens with equity release when one person dies?
What happens to equity release on death depends on whether the plan is in joint or single names. If the property is owned and occupied by one person, the lifetime mortgage is paid back once they have died or moved into permanent care.
If the property is occupied by a couple, then paying back equity release will depend on whether the lifetime mortgage is in joint or single names.
Joint names
A lifetime mortgage in joint names is only repaid once both homeowners have either died or moved into care.
When the first person dies, the loan remains in place and the surviving spouse or partner can continue living in the property until they either die or move into care. At which point the property is sold and the equity release loan repaid.
The surviving spouse/partner will need to notify the lender of the death, but other than that, there are no changes to the lifetime mortgage.
Single name
If the property is occupied by a couple but the lifetime mortgage is in a single name, the equity release loan will need to be repaid once that person dies or moves into care. For this reason, lenders usually recommend couples arrange a joint plan.
The surviving spouse/partner should advise the lender of the death and the property will need to be sold within the 12 months’ timeframe.
What happens to equity release if I move into long-term care?
If your equity release mortgage is in your name and you move into permanent care, the loan will need to be repaid in the same way as if you had died.
If your lifetime mortgage is in joint names, the equity release loan will only have to be repaid once both parties have either moved into care or died.
Equity release and inheritance tax
The impact equity release has on inheritance tax could be beneficial, however it depends on your situation and the value of your property.
For example, if your property value is above the inheritance tax threshold, releasing equity could reduce the value of your estate so there won’t be any tax to pay, but only if the money is spent and not invested.
Any money released that is not spent will form part of your estate and therefore may take you back above the inheritance tax threshold.
If you release equity to give to someone, perhaps as a living inheritance, it will reduce the value of your estate. But only if you live for a further 7 years. If you die within 7 years of gifting the money, it will still be classed as part of your estate, which means it could be liable for inheritance tax.
Can you inherit equity release debt?
The good news is that you cannot inherit equity release debt as long as the lender is a member of the Equity Release Council. The ERC’s no negative guarantee ensures families will not be liable to pay any shortfall if the debt is greater than the proceeds of the sale of the property.
All ERC members must adhere to this guarantee, so regardless of the size of the equity release loan, your loved ones won’t be left out of pocket.
Will paying back equity release affect my family’s inheritance?
Paying back equity release will affect your family’s inheritance as the loan is usually repaid from your estate once you die or move into care. Having said that some lifetime mortgage providers do offer schemes that allow you protect a percentage of your estate, ensuring some of your family’s inheritance is guaranteed.
Can you pay back equity release before death?
You can pay back equity release early however you could incur early repayment fees. If you think there is a chance you may want to repay some or all of the loan off early, it could help to discuss your options with a qualified lifetime mortgage adviser, as there are plans that offer a greater level of flexibility when it comes to repaying the loan.