How does equity release work when you die?

An equity release company will allow homeowners to access some of the money tied up in their property. Common methods include lifetime mortgages, whereby you take a loan out against your property.

Or, you can release equity via home reversion, which involves selling your home to an equity release provider. You can work out how much equity you have in your property using an equity release calculator.

When you take out your first plan, equity release lenders will usually give you a welcome pack that gives you all the key details your beneficiaries need following your death.

But how does equity release work when you die? In this article, we'll guide you through the process, what your options are, any charges you need to pay, and how to help your beneficiaries navigate the next steps.

How equity release works when you die

When you pass away, your home is usually sold by the executor of your estate. The sale proceeds are then used to pay back any equity release products, as well as any solicitor and agent fees. Any money left over is then paid to the beneficiaries named in the will.

As part of your equity release welcome pack, you'll get a plan reference number which your beneficiaries or executors will need to quote when talking to your lender. They should do this as soon as possible after you pass away.

The lender will then send them a letter asking to be kept updated on how the loan will be repaid, as well as the progress of the sale of the property. Once everything has been repaid, the Land Registry will be updated to show there aren't any charges left on the property.

Lifetime mortgage:

A lifetime mortgage refers to taking out a mortgage secured on your main property whilst still maintaining ownership.

With a lifetime mortgage, you can make repayments or let the loan accrue interest, and the equity release plan continues until the last homeowner dies or moves into long-term care.

The total loan amount of the lifetime mortgage needs to be repaid by selling the property once that happens. However, you can repay the outstanding debt with funds from other assets if they're available.

Home reversion plan:

A home reversion plan means you sell part of all of your home to a provider in return for a lump sum or regular payments. When the last homeowner passes away or moves into long-term care, the property is then sold and any proceeds are shared according to how much the provider owns.

When does an equity release plan need to be repaid?

Most equity release plans need to be repaid within one year of your death. Once your beneficiaries have contacted the lender, they'll ask for a copy of the original death certificate and the probate document so they can get in touch with your executors about how they intend to repay the plan.

Selling a property to repay the loan from your equity release plan

You may need to sell your property to repay your equity release loan, but it'll depend on the type of equity release you've used.

A lifetime mortgage, for example, will usually be paid back through a property sale, but you don't have to use your property if you have enough money from other assets to pay the outstanding balance.

Paying back a home reversion scheme

Because a home reversion means your provider owns a share of your property, most of these schemes need you to sell. And in most cases, your beneficiaries will need to sell the property soon after the last occupant has passed away (sometimes the deadline can be in as little as four weeks).

Your beneficiaries could buy the property back, but it would have to be bought back at current market value, which could be higher than the original price.

The surviving partner

A lot of people will have concerns about their partner's future. They'll want to know their partner can stay in their home after they pass away. You can do this by taking out your equity release mortgage under joint names. Having a joint plan will ensure your partner can stay in the property until they pass away or move into long-term care.

The surviving plan holder would also have the option to downsize without having to pay off the equity release plan straight away. As long as the lender agrees that the new property works as security for the equity release plan, your surviving partner will be able to go ahead with the move.

The equity release plan will then end once the remaining plan holder has passed away or moved into long-term care, after which the beneficiaries will need to repay the loan.

If it's only your name on the plan, your surviving partner may have to move out so the property can be sold to clear the debt.

You may have an equity release scheme that allows the remaining plan holder to repay the loan if their partner dies. This is known as the Significant Life Event exemption. In this case, the equity release provider will usually give you three years to pay the loan without any extra costs.

What is a protected equity guarantee?

Releasing equity can reduce the amount of inheritance left to your family or loved ones after you pass away, especially if it uses up a large portion of the property's value.

That's where protected equity guarantee comes in. Ring-fencing some of your home's value ensures your family will still inherit a portion of it.

Protected equity guarantees, also referred to as inheritance protection guarantees, are often built into lifetime mortgages, and lets you choose how much equity you want to protect. Of course, the more you choose to protect, the less you'll be able to release from your home.

Inheritance tax implications

Equity release plans can sometimes reduce the amount of inheritance tax (IHT) payable on your death. Inheritance tax liability is calculated based on the size of your estate, so if you've already spent the money through equity release, it can't be taxed.

Using equity release money as a gift to a family member can also have implications when it comes to inheritance tax. If you live for at least seven years after gifting the money, your inheritors won't have to pay any tax. But if you pass away before then, the equity release amount will be subject to inheritance tax. And if you pass away within three years, the full 40% will have to be paid.

Consulting a financial adviser

If you've been using an equity release plan, it's really important for your beneficiaries to consult a financial adviser after you pass away. It can be a very difficult and emotionally exhausting time for the surviving friends and family, so it's really helpful to have an expert to guide them throughout the process and ensure the plan is being managed in the best way.

Consulting a financial adviser can also help you explore plans with lower interest rates, better features and more flexibility. They can also run benefit checks to see if your equity release affects your eligibility for extra pension credits or council tax reduction.

If the surviving partner wants to downsize to a new property, an expert can also look at whether their lifetime mortgage is transferable or if they need to pay an early repayment charge.

Paying back your equity release plan before you die

You do have the option to repay your equity release plan before the completion date, but there will often be early repayment charges involved. Depending on which lender you're with, this could end up being more expensive than continuing with your plan until the initial agreed end-date. It's recommended to seek professional advice before you make any final decisions.

When do you have to repay the equity release lender?

You'll have to pay the equity release loan once the final borrower has passed away. So, if you have a joint equity release plan, you'll only have to pay back the loan on the death of the second borrower. The final debt amount to be paid includes any interest accrued during the life of the mortgage.

Because the debt is usually paid from the proceeds of the property sale, the lender will give you a reasonable amount of time to get the property sold and the balance paid. Most equity release providers will usually allow 12 months after the death to repay the debt, but some may allow up to three years.

Who repays the equity release lender?

The executor of your estate will be responsible for repaying the equity release, which is usually paid from selling your property. Any money left from the sale will be distributed according to your will.

No Negative Equity Guarantee

Some borrowers are concerned that if house prices fall, the lender will end up being owed more than the value of the property. However, a lifetime mortgage has to meet equity release council standards, which means your estate will never owe more than the value of your property.

This is known as a No Negative Equity Guarantee.

What happens if my beneficiaries want to keep my property?

In some cases, your beneficiaries might want to keep your property, which means the executor might repay the outstanding debt with other parts of the estate. This means your beneficiaries can inherit the property without having to pay any Stamp Duty.

They may also choose to buy the property from the estate, which they can fund with their own money, or with a residential or buy-to-let mortgage. This route may incur Stamp Duty charges.

Moving into full time care

If you move into full time care or sheltered accommodation in later life, your equity release lender will consider that to mean you won't be returning to the property. This means your plan ends, and the lender will need to be paid the money owed.

If both you and your partner are plan holders and one of you moves into long-term care, your equity release plan continues until your partner dies or also moves into long-term care.

If the property needs to be sold to pay the equity release provider, any extra funds can be used for ongoing care costs like private care or funeral costs.

If you need state-funded care in England and Northern Ireland, your council will conduct a means test to see how much financial help is available to you.

If your assets are worth more than £23,250, you'll have to pay for all costs, but if you have less, the state will cover some (and in some cases, all) of the cost. This will usually mean your property is sold regardless which equity release product you have. Bear in mind that different rates will apply in Scotland and Wales.

Summary: The last homeowner pays!

Long story short: the last borrower of your equity release plan will be responsible for paying back any outstanding debt. There are measures you can take to ensure your loved ones can stay in your home after you pass. Just make sure it's laid out carefully in your equity release plan when you apply.

It's also important to seek professional guidance throughout the whole process to ensure you get the best deal to suit your needs and secure your family's future.

If you're ready to sell a home left to you by a family member or loved one, it's really important you use the right estate agent to suit your needs. Especially if the property needs to be sold to pay off the balance of an equity release product.

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