What Happens to an Equity Release Loan When You Die?

Under the rules of equity release, you don’t usually need to make any repayments within your lifetime. But what happens to the loan when you die? Before you apply for an equity release mortgage, you’ll want to understand that too.

In this guide, we’ll explain what happens to your home after your death and what your loved ones will need to take care of to ensure your loan is repaid. This will help you to decide whether equity release is right for you. 

Topics we’ll cover are…

How does equity release work when you die?

Once you die – or, in the case of joint lifetime mortgages, once both you and your partner die – the loan is due to be repaid to the equity release provider, along with the interest that has accrued on the loan amount. It will be the responsibility of your beneficiaries or executor named in your will to repay the loan. In most situations, they will do this by selling your property.

Repaying an equity release loan after death

After your death, your beneficiaries will have two different options.

Option one: Selling your home

In most cases, your home will need to be sold to repay the loan. The first step is for your beneficiary to contact the lender and provide your death certificate. They will then have a limited time to arrange the sale of your home and the repayment of the loan. This is usually 12 months unless stated otherwise in your contract.

After the sale, the estate agent’s fees and solicitor’s fees must be paid from the proceeds. Then, from the money that remains, the loan amount must be repaid along with any interest that has accrued. Interest continues to accrue after your death, up until the loan is repaid.

Option two: Keeping your home

If you have enough money in your estate to repay the outstanding debt without selling the property, your beneficiaries can keep the home. This might be the case if, for example, you have a life insurance policy that will pay out more than you owe.

Alternatively, your loved ones might be able to repay the loan with their own money so that they can keep the home for themselves. This is something you’ll need to discuss with them in advance, to understand if they’re willing and able to do so.

However, it’s important to note that not all equity release mortgages can be repaid in cash. With home reversion plans, the home becomes the property of the lender once the contract is signed, so there is no opportunity to pass it on to your loved ones. So, this is something you’ll need to consider before you sign a contract.

How much will your loved ones need to repay?

The amount that will need to be repaid after your death depends on:

• The loan amount you requested
• The interest rate you agreed
• The amount of time that has passed since you took out the loan

Most equity release mortgages have a ‘no negative equity guarantee’. This means that, if the proceeds of the property sale are not enough to repay the loan amount plus interest, the shortfall is absorbed by the lender. Your beneficiaries will not be responsible for repaying any excess debt.

If there is money left over after repaying the lender, it will be inherited by your beneficiaries, or distributed as instructed in your will.

How a broker can help

Speaking to a broker about equity release can help in a variety of ways.

Providing advice

Taking out an equity release mortgage is a huge decision that you shouldn’t rush into. A broker will explain it in detail so there are no surprises once you’re committed to the contract. They will also discuss other options with you and make sure you’re happy with your decision.

Finding the right mortgage

Equity release is a very broad category containing numerous products for different situations. A broker will discuss your needs and what you would prefer happens after you die, to make sure you have the right product for your circumstances. For example:

• If you want to ensure that your loved ones aren’t left out of pocket by your loan, they’ll make sure your deal has a no negative equity guarantee.
• If you want the option to repay the loan without selling your property and you’re worried about whether you and your home will be protected, they’ll make sure you’re only looking at products from Equity Release Council-approved lenders.

Minimising the costs

A broker will also compare the interest rates and other costs related to any equity release mortgage products you’re interested in, to help you understand how much will need to be repaid after your death. Getting the best rate can help you to leave more to your loved ones.

Getting all your paperwork in order

Working with an expert to set up your loan can make things as easy as possible for your loved ones after you’re gone. Your broker will make sure you have all the documentation together that your beneficiaries will need.

What happens with joint equity release mortgages when someone dies?

If you and your partner take out an equity release mortgage (also known as lifetime mortgages) and you’re both named on the contract, you both have the right to stay in your home for the rest of your life. If you outlive your partner, you’ll be entitled to continue living there and vice versa.

This right is protected by the Equity Release Council. Before signing a contract (or even applying) you should check that your mortgage provider is approved by the Council, meaning they have agreed to this rule and others.

When one partner dies, the surviving partner (or a family member) will need to contact the equity release lender and provide the original death certificate by post. It will be returned once the lender has entered the death on their system. There will be nothing more to do at this point.

Repaying your mortgage before death

With some equity release mortgages, you’re free to repay the loan before your death if you want to, although you will often need to pay an early repayment charge.

These charges vary between different lenders and will usually fall over time, for example, the charge could be 5% if you repay in the first five years, 3% before year eight, and 0% after this. However, they are sometimes more complex, so you’ll need to check your contract or ask your broker for more information.

Equity release and inheritance tax

Releasing equity from your home will reduce the size of your estate for inheritance tax purposes. For example, if your home is worth £500,000 and you release equity of £200,000 (which you spend in your lifetime) and accrue interest of £50,000, the taxable value of your property is £250,000.

However, before considering equity release as a way to reduce inheritance tax, you should be aware that a significant portion of your estate is inheritance tax-free. UK residents are entitled to pass on:

• All wealth and assets to a spouse or civil partner free from inheritance tax
• £325,000 to other loved ones free from inheritance tax
• £175,000 of the value of their main residence free from inheritance tax

This means that, for most married couples (or civil partners), inheritance tax planning only becomes a consideration when your combined wealth exceeds £1 million. For more information on this topic, it’s worth speaking to an expert about your specific financial situation.

Getting matched with an expert equity release broker

When seeking advice on equity release mortgages, it’s crucial that the information you receive is tailored to your circumstances. There is no one-size-fits-all solution and what’s right for one person could be wrong for you.

So, before making any decisions, you should speak to an expert who knows all the details of the equity release mortgage market and help you avoid any costly mistakes.

We work with numerous brokers with this experience and can put you in touch with one through our free broker-matching service. Simply tell us a few details about you and your situation and we’ll arrange a free, no-obligation chat. Call us today on 0808 189 0463 or make an enquiry online.