Many people wonder what happens to their own or a loved one’s equity release plan when the person who took on the plan passes away.
Simply put, when you die, the equity release plan ends and the equity release provider must be told about the death. The house may then have to be sold, if the sale is required to pay off the debt.
This article talks mainly about lifetime mortgages and not home reversion plans (the other type of Equity Release). If you want to find out more about what happens to your own or a loved one’s equity release plan then please get in touch, we are Bristol based Equity Release advisors and are happy to answer any questions you may have. For more information please keep reading.
After the death of the last homeowner or when the last homeowner moves into long-term care, the beneficiaries must inform the equity release provider.
The equity release plan will need to be repaid, and is typically to be paid back within 12 months. Some estates decide to put the house on the market to get the money needed to pay the provider. Others opt to put the house up for rent in the short term to help ensure that the equity release provider is paid at the end of the month. However, having tenants could cause some challenges when coming to sell the property.
However, although for the most part lenders give the estate a year to pay back the money, some only give you six months. So it’s important to check with the lender to make sure.
The beneficiaries will need to show the Equity Release provider the death certificate, and any other related documents. This is to ensure that the lenders know that they now need to deal with the beneficiaries/executors with regards to repayment of the equity release mortgage.
A point to note is that the interest keeps on building during the months after the death/moving into long term care. If the money can’t be repaid within the 12 months (or whatever the term is), then the provider will usually enter a conversation with the beneficiary to come up with a new plan to be able to pay the money. Ultimately the provider is able to repossess the house if the money is not paid back.
Unfortunately, the interest on an Equity Release loan does not stop accruing at the point of death of the last policy holder. Upon death or vacating into long-term care, interest on the equity release loan continues to build up and will ultimately need to be paid back with the rest of the loan. In other words, the interest only stops when the loan is paid back.
Managing finances and any debt repayments after death is important and as such understanding the necessary steps involved is key.
In such an event, it is the executor of the estate who is responsible for dealing with and repaying any equity release loans. To begin the process, the beneficiaries or estate executors must contact the lender and provide them with a copy of the death certificate and the probate paperwork. Once this is done, the lender will send a letter to the executor(s) requesting updates on how they plan to repay the debt and, if applicable, any additional equity release interest accrued.
Fortunately, if the equity release plan is endorsed by the Equity Release Council*, a ‘no negative equity guarantee‘* will be built-in, protecting your estate from owing more than the value of the property. However, without this agreement in place, the executor will be responsible for making any additional payments.
It is important to note that lenders typically allow sufficient time, usually up to 12 months but sometimes up to 3 years, for your estate to sell the property to repay the amount owed.
When considering an equity release plan (whether lifetime mortgage or home reversion plan) it is crucial to ensure that it is written in both partners’ names (if appropriate to the situation of course). This critical step is imperative as it safeguards the remaining plan holder’s right to continue living in their home even in the unfortunate event of their partners’ death. In doing so, the equity release plan will continue until the passing away of the remaining member or if they move into long-term care.
After a partner’s death, the remaining plan holder must notify the equity release company of this change in circumstances. This notification can be made by the remaining plan holder or one of their family members. The lender will then request the deceased’s original death certificate as proof and note this on file to ensure all procedures are compliant with the policy’s guidelines.
If you do inherit a property with an active equity release mortgage, then it will be the executor of the estate who will be responsible for ensuring that the lifetime mortgage and any interest is repaid. This could mean that the house needs to be sold in order to cover the cost of the repayment. While this may result in some proceeds being generated from the sale, it is important to note that there may be no equity left in the property, and all proceeds could be needed to repay the equity release plan. This is a complex situation that requires careful consideration and expert advice. It is recommended that anyone who is in this situation seeks independent financial advice to fully understand their options and make informed decisions.
Facing the possibility of moving into long-term care is often a difficult and emotional experience. It’s important to be aware that if both you and your partner are in need of long-term care, then unfortunately the equity release plan will likely come to an end. This means that your property will need to be sold, as per the agreed arrangements, to repay the lifetime mortgage.
However, if one of you requires long-term care whilst the other is still able to safely reside at home, the plan you’ve established can continue, as long as the plan was taken out in both of your names. Knowing that your partner can remain at home and receive the necessary care can be a relief during a stressful time. Planning ahead for the possibility of long-term care is an important step to take, and can help ensure that your loved ones are taken care of in the best possible manner.
What if you want to ensure that your beneficiaries can keep your property, even after your passing? It can be a difficult task, but it is important to make sure that your hard-earned assets are preserved and passed on as per your wishes.
Once you’ve designated an executor of your estate, they will be responsible for repaying any equity release interest and loan owed from other parts of your estate to ensure that your beneficiaries can keep your property intact. However, if there is not enough money left in the estate to repay these debts, then additional costs could be incurred as well as some potential additional responsibilities.
For example, if your beneficiaries pay money into the estate or to other beneficiaries, SDLT (Stamp Duty Land Tax) may be due. Fortunately, your beneficiaries have the option to buy the property from the estate directly. In this scenario, your beneficiaries are allowed to use any financial method they choose, such as obtaining a residential or buy-to-let mortgage for the purchase. So, it is important to consult with a trusted estate planning advisor or independent financial adviser to help you navigate these complex issues.
Making the decision to take out an equity release plan can have a significant impact on your will and wider estate planning with several areas to think about.
One of the most significant effects of taking out an equity release plan is that it can potentially reduce the value of the inheritance that you leave behind for your loved ones. If you opt for an equity release plan, you are essentially reducing the amount of money that will be available for your heirs once your property is eventually sold, by the value of the plan including all accrued interest. This means that the overall sum that might have been left as part of your inheritance will be less than you may have initially intended.
While it is generally true that you cannot go into negative equity if you choose an equity release plan backed by the Equity Release Council, it is possible that the value of your property may end up being equal to or lower than the repayment to be made to the lender. As a result, there may not be much cash, or any, left at the end of the process.
Another key consideration when taking out an equity release plan is the potential need to update your will accordingly. For example, if your existing will contains specific sums of money designated for your loved ones based on the value of your home, an equity release scheme will change these figures, which means you will need to revisit your will and make updates accordingly. However, if you have used percentages rather than fixed amounts, there may be no need to amend your will, as these percentages will apply to the residual value of the property once the lender has been paid. Either way, it is worth reviewing your will to check if it is effected and if there is any action that needs to be taken to ensure your wishes are met.
As Inheritance Tax (IHT) is calculated based on the net size of your estate (after all debts are paid), releasing equity through a lifetime mortgage in your home would likely reduce the eventual value released from your property, resulting in either less Inheritance Tax payable upon your death, or the estate falling completely below the threshold, provided the equity released is spent rather than invested or saved (and so would stay in the estate).
In this instance, it may be worth talking to a financial planner who works with estate planning, to explore the potential effect of equity release upon any potential inheritance tax.
Equity Release can be a great way to release cash tied up in your property that can be used for a variety of reasons. From helping family to buy their first home, improving your own home for your retirement years., or simply releasing cash so that you can spend it on enjoying your remaining years.
However, it is important to be aware of all the consequences of taking out an equity release plan, whether that is a Home Reversionary plan or a Lifetime Mortgage. One of the important things to think through is what happens to your equity release plan after you die, as it may be your loved ones who have to deal with the consequences and it could end up impacting their lives.
Hopefully this article has helped answer any queries that you may have had about what happens to Equity Release plans after the death of the policy holder; but if not then please do feel free to get in touch, as Equity Release Advisers , Leaf Financial Advisers can help with Equity Release alongside a range of other financial advice areas.