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You’re likely wondering what happens to your own or a loved one’s equity release plan when the person who took on the plan passes away.
When you die, the equity release plan is over, the equity release provider must be told about their death and the house must be sold.
This article talks predominantly about lifetime mortgages instead of home reversion plans. If you want to find out exactly what happens to your own or a loved ones equity release plan, then keep reading…
Following the death of the last homeowner or when the last homeowner moves into long-term care, the equity release must be paid back. For the most part, lenders give your estate a year to pay back the money. But some only give you six months.
From death or vacating into long-term care, interest on the equity release loan continues to accrue.
Once your beneficiaries or the executors of your estate have contacted the lender, they will ask for a copy of the death certificate and the probate paperwork so that they may contact the estate’s executors in the future. The executor of your estate is the person charged with paying the equity release lender.
The lender will then send a letter to the designated executor(s), requesting that they keep the lender updated on how they intend to repay the debt.
If the person took a plan endorsed by the equity release council, there would be ‘no negative equity guarantee’ built-in, meaning that you won’t owe more than the house is worth. However, in the absence of a negative equity guarantee, the executor will be required to pay any additional equity release interest accrued.
You must ensure that the equity release plan, lifetime mortgage, or home reversion plan is written in both partners’ names. That way, when one partner dies, the remaining plan holder will continue to live in their home, and the equity release plan continues until they pass away or move into long-term care.
Either the remaining plan holder or a family member should contact the lender and notify them of the change in circumstances regarding the equity release plan. The lender will request the original death certificate as proof and note it on file.
If you inherit a house with an active equity release mortgage, it will be down to the executor of the estate to repay that lifetime mortgage and interest. They may have to sell the house to do this, in which case you’d be entitled to any proceeds left from the sale of the home, it is possible that no equity remain in the property and all proceeds of the sale are required to repay the equity release plan.
If both you and your partner move into long-term care, your plan will come to an end and your property will need to be sold as planned. If only one of you needs long-term care your partner can continue to reside at home if the plan was taken out in both of your names.
Suppose you want to ensure your beneficiaries can keep your property. In that case, the executor of the estate will have to repay the equity release interest and loan owed from other parts of the estate. If there is not enough money left in the estate, research suggest paying into the estate could then be liable for SDLT. If your beneficiaries pay money into the estate or pay money to other beneficiaries, SDLT may be due.
Alternatively, your beneficiaries may choose to buy the property from the estate directly. They will be allowed to use whatever financial methods they choose in this scenario, including a residential or buy-to-let mortgage.
The effect that a decision to take out an equity release plan may have on your will is going to depend on several factors, including:
It can reduce the value of the inheritance you leave behind for your loved ones. By taking out an equity release plan, you reduce the amount of money that will be left once the property is sold, thereby reducing what is left as part of your inheritance.
While it is not possible to be in negative equity at the time of sale (assuming the product is backed by equity release council), it may be that the value of your property is more or less the same as the repayment to be made to the lender. This will mean that there may not be much cash left at the end of the process.
You may need to re-word your will. If your will includes sums of money left to your loved ones based on the value of your home, an equity release scheme will change that, so you will need to revisit your will and update it. If you have used percentages rather than fixed amounts, then there is no need to make any changes as those will be applied to the residual value once the property has been sold and the lender has been paid.
Because Inheritance Tax (IHT) is calculated based on the size of your estate, releasing equity through a lifetime mortgage in your home would reduce the value of your property, resulting in either less Inheritance Tax payable upon your death, or your estate may fall completely below the threshold, provided the equity released is spent rather than invested.
A financial consultant can definitely assist you if you’re a beneficiary or a surviving spouse. Here at Joslin Rhodes, we can help you weigh up the decisions and support you through this difficult time. Always make sure your equity release company is approved by the equity release council.