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Can Equity Release Be Repaid Before Death?

Today, we’re going to answer the frequently asked question ‘can equity release be repaid before death?’ as well as explain what happens when your equity release plan comes to an end, whether you have repaid your loan or not.

Before we get to this point, we want to introduce you to the equity release scheme in case you aren’t familiar with it.

Why Do People Release Equity?

There are many reasons people decide to take out equity from their homes. The main appeal of the equity release scheme is the fact that the money that is borrowed does not have to be repaid while the homeowner is still alive.

This provides an opportunity for equity release consumers to spend a large amount of their loan without worrying about needing to save up to make repayments.

For this reason, some people decide to make large purchases with their loan. One example of this is homeowners who take out a second home lifetime mortgage and purchase a second property that they live in for half of the year.

On the other hand, others release equity as a way of boosting their monthly income. Instead of requesting a lump sum, they opt for monthly payments to help with expenses such as food and electricity.

Which Equity Products Can You Have in the UK?

In the UK, you can have a lifetime mortgage or a home reversion.

Home reversions involve selling some of your home to an equity release lender. You can sell your entire home or just a share of it, but either way, you will be able to continue living there for the duration of the scheme.

Lifetime mortgages involve taking out a mortgage that does not need to be repaid while you are still alive. Again, you can stay in your current property as long as the scheme lasts (which is usually up until your death).

If you choose to have a lifetime mortgage, keep in mind that there are eight different types to choose from. Make sure you look into each one before making a final decision, as your equity release plan will define your equity release experience.

Can Equity Release Be Repaid Before Death – The Facts

Now onto the topic of this article: can equity release be repaid before death?

The answer is yes, equity release can be repaid before death. However, this is not possible for all equity release consumers.

Only certain equity release lenders will allow you to make repayments on your loan, and this will only be permitted if it is written into the criteria of your equity release plan.

1. Repaying a lifetime mortgage early

If you wanted to repay your loan, it would be best to opt for the voluntary repayment lifetime mortgage. This is because it is designed for people who want to make repayments on an ad-hoc basis, so there will be no penalties for doing this.

You could also select an interest-only lifetime mortgage and repay the interest on the loan either on an ad-hoc basis or each month (1).

This may seem less significant than repaying the loan itself, but equity release loans work on compound interest, so it would be extremely beneficial to deal with the interest ahead of time rather than letting it accumulate.

Another important point is that many equity release plans have been updated to allow you to make early repayments without facing penalties. You may not be able to repay above a certain amount, but you could still make small contributions.

Sometimes, it is possible to request a redemption statement from your equity release lender.

This will inform you how much interest you currently owe, how much of the loan is remaining, and whether you would need to pay a fee for early repayment. After securing this, you would be able to make a lump sum payment to your lender.

2. Repaying a home reversion early

If you have had a home reversion, it may be trickier to repay the loan early, as you will have given away a share of your home to the equity release provider.

You would have to have enough money to purchase the share back, but bear in mind it is likely to have increased in value since you sold it.

What’s more, providers do not offer the full market value of the property, so you will not have been paid for the full share in the first place.

If you have enough money in your pension and/or savings, or you can borrow money from your loved ones, this may be an option for you.

Do Most People Repay their Equity Loan Before Death?

Most people do not repay their equity loan before death. There are various reasons for this.

Firstly, equity release is advertised as a unique scheme in that it does not require repayments.

This means many people are drawn to this scheme because of the way it stands out against traditional loans, so they make the most of the lack of pressure to pay back the loan.

Secondly, many people who release equity are cash poor, and they are using their equity loan to pay for necessities such as paying off debts and covering everyday living costs.

This means they simply cannot afford to make repayments, as their equity loan is one of their only sources of income.

Finally, in rare cases, homeowners do not have family members they want to pass their money on when they pass away. This means they do not have to worry about how much debt they will be in upon death, and therefore they do not feel obliged to repay their equity loan.

Pros Of Repaying Equity Release Before Death

Firstly, if you repay your equity loan before death, you will owe back less money by the end of the scheme.

This is important for people who want to leave a good amount of money to their family, as repaying most of the loan would mean the equity release lender would take less money from the property sale, and their family would inherit more.

Secondly, if being in debt worries you, despite knowing you do not have to repay the money, it may put your mind at ease to make small repayments. This will only be possible if you have another source of income such as savings or a state pension.

Finally, if you decide you no longer want to be an equity release customer, repaying your loan is the only way you would be able to get out of the scheme.

Alternatively, you could stick with the scheme and ask to downsize, which may involve repaying a percentage of your loan to make up for the new property being lower in value.

Cons Of Repaying Equity Release Before Death

Firstly, your equity release plan may not be set up for repayments. This will either mean that you simply cannot repay your loan, or that you will be charged for doing so.

Early repayment charges can cost up to 25% of your loan amount, so this is certainly something to avoid.

Nowadays, many equity release plans manage early repayment fees on a sliding scale. In your first year, it would cost you 10% to repay your loan, then 9% in your second year, 8% in your third year etc.

This means it is certainly unadvisable to make large repayments in your first year of equity release, but the damage is less severe as the years go by.

Secondly, if you do not have people you want to leave a significant amount of funds to, there may be no point in repaying your loan. You could enjoy all of your money instead, which would make for a more relaxing retirement.

Finally, it goes without saying that you should avoid repayment plans if you would struggle to afford them. Some equity release plans expect monthly repayment, and if you did not provide the money, it would be equal to missing deadlines on traditional loans.

What Happens If You Do Not Repay Your Equity Loan Before Death?

Many equity release consumers do not repay their equity loan before they pass away. In this instance, the equity release lender would sell your property as usual and take some of the funds from the sale.

The only difference is that they would need to take more money to account for the fact that you still owed them the full loan amount plus interest.

If you did not protect an inheritance for your family, they could possibly end up with no inheritance. However, it is very easy to implement inheritance protection, so we recommend doing this.

What Happens If You Move Into Permanent Care?

Equity release plans will come to an end if you enter long-term care, and the process is the same as it is when you pass away. Your family informs the lender, they sell your home, and collect the money they need.

It may be possible for you to ask for some money towards your care costs, and this will be deducted from the money that goes to your family.

What Happens If I Die and My Partner is Left With the Debt?

If you signed off on equity release with your partner, you are both entitled to live in the home when either one of you dies.

This means your partner would continue to enjoy the equity loan once you passed away, and they would not have to repay any money or move out of the home.

However, the interest would continue to accrue as normal, so the amount owed would steadily increase until your partner passed away.

If your partner did want to finish with equity release, they could ask to repay the loan, and many equity release providers would give them three years to do this without charging a fee.

Alternatively, if they wanted to downsize to a property that was more suitable for them, they could ask the lender for permission to do this. It would involve repaying some of the loan.

Sometimes, there is money available in a drawdown facility, and your partner would be able to access this to cover the costs of your death, such as your funeral.

We always recommend that surviving partners speak to a financial adviser about how to continue with equity release independently. Their adviser may be able to help them check their eligibility for benefits, and update or switch their equity release plan for more flexibility and lower interest rates.

If you happened to have a tenancy in common with your partner, it would be wise for your partner to seek legal advice about how to put the deeds into one name or break the trust. However, most married couples seek joint ownership rather than a tenancy in common, so a solicitor is not usually required.

In the event that your equity release application does not have your partner’s name on it, they would be expected to get ready to move out of the home. This is why we recommend making joint applications if you are married.

What Should My Family Do When I Pass Away?

When you first take out equity, you will be given a welcome pack that explains how to complete all the possible stages of equity release, including the contact details for your lender in the event that you pass away.

We recommend going through this pack with your family, as it is important that they know which steps to take when you pass away. They should make note of your plan reference number, as they will need this when communicating with the equity release provider.

The equity release lender will give your family a set amount of time to move your possessions out of your home.

This will be a much shorter period of time if you had a home reversion. Then, the lender will arrange for your home to be sold, so your family does not have to worry about managing this.

What Happens If My Family Cannot Afford to Repay My Loan?

Your loan is repaid through your property sale, so your family does not need to worry about paying any money back. If your property is too low in value to cover the cost of the loan, your family would technically have to pay up.

However, if your equity release lender is regulated by the Equity Release Council, you will never have to worry about this, as they have to offer a no-negative equity guarantee.

This means that the lender will never ask for more money than you originally borrowed, whether or not your property has dropped in value.

We advise all of our customers to find a lender that is regulated by the ERC, as you do not want to end up getting your family into debt because you have chosen an unreliable lender.

Will My Family Have to Pay Tax On My Equity Release Funds?

It is very unlikely that your family will have to pay inheritance tax on the funds they receive, as most equity-release consumers do not reach the threshold for estate value.

This is because they have taken a significant amount of equity out of their property, reducing its value.

This means that equity release really is a tax-free scheme, given that homeowners do not pay income tax or capital gains tax on the money they receive from their property.

Can My Family Inherit My Property?

Sometimes, your family will be able to inherit your property when you die. They would have to dip into their own funds, or any remaining funds in your estate, to do this.

Not all equity release lenders will allow this, so this is something to discuss when you are making your application.

What’s more, not all families would be able to afford this, so it completely depends on the financial situation of the family in question, as well as the stance of the lender.

If your family is in the position to purchase your property, they would be able to inherit it without paying Stamp Duty Land Tax (SDLT).

What Happens If My Equity Release Lender Goes Bust?

It is unlikely that your equity release lender will go bust, so this should not be a big concern for you with equity release. Nevertheless, it’s important to think about what you would do in this situation.

Most often, your equity release plan would be managed by a new lender, and the regulations would be exactly the same (2). This means the interest rate would stay the same, the remaining loan amount would be the same, and the new lender would have to have the same boundaries as the old one.

Speak to Equity Release Warehouse Today

Please get in touch with us to find out more about making early repayments with equity release.

Do not let the early repayment charges scare you, as they are not a part of every equity release plan, and they are certainly not always as high as 25% of the loan amount.

It is becoming increasingly common for equity-release consumers to pay back their loan early, so if you pursued this, you would not be alone.

We will be able to advise you on how to find a lender that allows early repayments and a plan that does not punish you for paying back your loan early.

On the other hand, if you are happy with the idea that equity loans do not need to be repaid early, we can talk you through how this works in terms of the lender benefitting from your home sale.

We have covered this briefly here, but it is important that you understand the process in more depth.

Please speak to your family about your decision to take out equity, as it will affect their inheritance, and it may even affect them in the near future depending on what you spend your loan on, and whether you choose to downsize before releasing equity.

It is also vital that you speak to a professional equity release specialist about how to get started with the scheme, and how to make a sensible decision about repayments.

We recommend getting a free consultation with us, as we will be honest about equity release rather than shying away from its potential drawbacks.

Overall, what you need to take away from this article is that equity release does not ever have to be repaid before death, but it certainly can be.

By talking to us, you can figure out which option would be best for you based on your financial situation.

References

[1] Can you pay back equity release? https://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/repay-equity-release/

[2] What Happens If My Equity Release Company Goes Bust? https://www.fscs.org.uk/