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What happens after you pass away is usually tricky to discuss with your loved ones. However, if you’ve taken out an equity release plan, it’s a conversation that is vital to have.
Although easy to take out and beneficial to many financial circumstances, Equity release loans may face some questions about what happens regarding repayment after you die.
This guide looks at what happens to your equity release scheme upon death.
Taking out an equity release is to unlock capital tied to your home. You’ll repay the original sum borrowed with interest after you pass away or move into long term care. When you die, your lender will expect repayment on the loan’s outstanding balance as soon as your home gets sold.
The concept behind equity release may seem straightforward in principle. However, often there are many questions unanswered for your beneficiaries and unknowns in how to proceed in settling debts. The first query is who will take charge of paying the equity release after the borrower passes?
The executor of your estate or the beneficiaries is generally responsible for organising the repayment of the equity release. These could be spouses, partners, children, or other nominated loved ones.
When an equity release plan gets taken out, you’ll be issued a welcome pack that includes all the information about your lifetime mortgage or home reversion scheme. There will be details of the plan, contact information for the lender, and steps to take regarding repayment after passing.
The recommendation is to make the location of this pack known to the executor or beneficiary to make the repayment process more seamless after the borrower passes away.
So how does the executor or beneficiary take action upon death?
We compare plans from the leading equity release providers
Once the borrower has passed, the executor or beneficiary should contact the lender quoting the reference number of the equity release plan. Lenders should be able to walk you through the next steps of the repayment process and answer any queries that the contacting party may have.
Get in touch with the lender as soon as possible after the borrower passes to avoid any complications. You’ll be able to address any anomalies regarding the equity release repayment. Sometimes there can be complications behind the plan, and getting in touch sooner will give time to address any issues.
The first query to the lender most likely would be how the plan gets paid?
An equity release mortgage has ties to the value of a home. There’s an expectation that the lender will collect the loan’s outstanding balance after the house gets sold.
The equity release provider will request from the beneficiaries a copy of the borrower’s death certificate and probate so that they can contact the executor of the estate moving forward. The executor will then receive a letter that requests that they keep informed about how the loan will get repaid.
Most of the time, the beneficiary will follow the original plan of using the capital from the borrower’s property sale to settle the equity release plans. However, it is ultimately at the beneficiary’s discretion how the loan gets repaid. Of course, that’s as long as the outstanding balance gets cleared.
So amid all the actions to take after the borrower passes away, how long does the beneficiary have to repay the equity release loan?
Generally, the beneficiary has up to 12-months to repay the outstanding balance on the equity release plan. It’s critical to note that even though the borrower has passed, the loan remains active as long as it’s unpaid, which will still accrue interest.
As mentioned above, it’s up to the beneficiary how the loan gets repaid. In some circumstances, they may want to keep the property. We’ll touch on that scenario further in the guide.
During the repayment period after death, the lender will regularly contact the executor for updates on repayment, including liaison with the estate agent regarding the home’s sale. But what if the deal gets complicated, or there are other repayment obstacles?
There are circumstances where repayment within 12 months may not be possible. The lender will enquire with the executor about the situation and find a solution pending the case.
The lender does retain the right to repossess the property should there be no repayments within 12-months after the borrower’s passing. However, this is a last resort action, where every effort will look towards a resolution.
Equity release can affect inheritance after you pass in two ways. The first is that there won’t be a house to pass down to your beneficiaries. In contrast, the second means there won’t be any money left in your estate.
There may also be implications regarding inheritance tax. Your beneficiaries could be subject to taxation should you pass a sizeable estate after the sale of your property.
But let’s look at the two more prominent concerns about how equity release affects inheritance.
Taking out an equity release plan means that there’s an expectation that your property will get sold to cover the outstanding balance of the loan after death. When the time comes, you won’t have a house to pass down to your beneficiaries as they may not be able to afford to retain the property.
If you take out a lifetime mortgage, the interest on the loan accrues as long as it’s active. Ultimately, a significant amount of interest may be accrued when you pass away, leaving little of the home’s sale proceeds to the beneficiaries.
Are there any ways to offer protection to the inheritance? Lenders will often offer a series of additional features to the equity release loan to give more inheritance protections, including:
You can discuss all these options with your lender if the inheritance is concerned. But what if the beneficiaries want to keep your property after you pass away?
Few options are available if the beneficiaries wish to keep the property after the borrower dies. Those include:
Even if the beneficiaries don’t have the funds to cover the entire sum owed for the property, they may have eligibility for financial options. These come in the form of residential or buy-to-let mortgages.
But what happens if a couple takes out the lifetime mortgage? Will the surviving partner have to sell the house despite intentions to remain there?
As far as the lender is concerned, the equity release plan is still in action as they are the co-owner of the property. That means the loan continues to run until the last person on the contract passes away.
Should one owner of the joint lifetime mortgage passes away, the outstanding balance will only need to get repaid after the second partner passes away. They may continue residing in the property without the need to make repayments until that happens.
All reputable equity release schemes follow the standards set by the Equity Release Council, where there is a rule that offers a ‘No Negative Equity Guarantee’ to the borrower. That means that the amount payable for the loan cannot exceed the property’s value.
Under no circumstances will beneficiaries have to pay more funds to the lender than the capital gained from the sale of the property. That guarantee offers protection that if house prices should fall during the life of the loan, the funds from home will cover the loan entirely when it comes time to repay.
Lenders try to make the repayment process after death for equity release as straightforward as possible. However, everyone’s circumstances are different, and there can often be complications or intricacies involved.
Many borrowers would consider the prospect of early equity release loan repayments to avoid passing a burden on to their beneficiaries. But is early repayment even possible?
Generally, yes, there are options to repay your equity release loan before you pass away. However, early repayments are often subject to early repayment charges (EPCs), which are sometimes significant.
In our ‘Can You Pay Back Equity Release?’ guide, you can read more about early repayments to discover repayment options. You can also learn about inheritance tax and how to minimise EPCs.