Many people have heard of equity release, but not many people are aware of the different types and the particular ins and outs of this popular financial product. One particularly commonly asked question is what happens to your equity release when you die.
So we’ll look at that question in detail, but before we do that let’s look at the basics of equity release.
After the borrower dies, their house is sold. The proceeds from the sale are first used to pay off the solicitor and agent’s fees and the remaining amount is used to pay off the loan.
What is Equity Release?
Equity release paves the way for you to unlock the value of your property whilst being able to stay in your home. There are several policies which let you release or access the cash or equity tied up in your home, provided you are aged over 55.
Some people think that it is necessary to have paid off your mortgage in order to apply for equity release, but that is not true. It is perfectly possible to obtain equity without having paid the full amount for your house.
When you apply for equity release, you have the choice of either receiving the whole value of your property in one lump sum or in smaller amounts on which interest will be payable accordingly.
How does it work?
Equity release is an ideal way to raise cash for the projects and requirements that you wouldn’t otherwise be able to fund, if you are not planning on leaving your home as an asset in your will. It is often considered a form of mortgage which isn’t completely paid off until death.
If you plan on passing on your property to your heirs, you should be aware that equity release usually means that there is less for them to inherit.
The following are two categories into which equity release products fall:
The lifetime mortgage option is the most popular form of equity release. It requires applicants to be over the age of 55 and allows you to borrow a certain percentage of your home’s value at a capped or fixed interest rate.
In this type of mortgage, which is different from a normal mortgage, you are not permitted to make repayments. As a result, the amount owed by you keeps increasing owing to the interest which compounds rapidly.
There are some variations of this mortgage offered by a limited number of companies which allow you to repay the interest and in certain cases, the capital as well. The overall cost is reduced in such mortgages. There is an agreed amount up to which you are permitted to borrow money and instead of interest being charged on the whole amount, it will be calculated on the basis of how much you have already borrowed.
Home reversion plan
Applicants need to be over the age of 60 to be eligible for a home reversion plan. A tax-free lump sum is paid to you by your provider for a portion of your home, which is generally below the market value of your property. After receiving this amount, you are allowed to occupy the property without having to pay rent for the same home until your death.
After the borrower passes away, the property is sold and the proceeds from the sale are split between the lender and those who are entitled to inherit the legacy depending on the percentage owned by each. There is a possibility that each side involved may get a higher amount, if the value of the property rises significantly.
For instance, if your property is valued at £200,000 and you decide to sell a 40 percent share in it, you may receive a lump sum of £40,000. There is a big disparity between the value of your house and the amount that you receive, but it is only because the provider needs to wait for several years before they get the money back. Assuming that after many years, when you die, the value of your property rises to £300,000, the provider will be entitled to 40 percent of the proceeds which would come to £120,000.
This plan works better for the borrower if property prices are expected to stay flat over a period of time in the future. But if the prices increase substantially, you will have repaid a higher amount than you would have had you opted for a lifetime mortgage.
How much does it cost?
The rate is 5.1 percent in the case of a lifetime equity release which compared to most standard mortgages is significantly higher. The jaw dropping price that must be paid by your estate is a result of not making monthly repayments. It is primarily due to the compounding interest that the debt keeps piling up and borrowers – or their heirs – end up paying much more than they have borrowed.
For instance, if your property is valued at £120,000, your age is 60 and you borrow £20,000 at the rate of 5.1 percent, the amount owed by you will double nearly every 14 years. This means that you will owe £40,000 if you die at 74 and £80,000 if you die at 88.
Besides the interest, upon your death, your estate will also have to pay stamp duty and arrangement fees. This depends on the type of plan you opt for, but it usually costs around £1500-£3000 and includes fees for legal work, surveyor fees and application fees.
Things to consider
The following are certain things that you must keep in mind when opting for equity release:
Don’t borrow it in one go
As there is compounding interest involved, borrowing the maximum amount of money that you can, in one go, means that it will prove to be more expensive for you. Therefore, you must borrow strictly as per your requirements and as little as you can. Also, wait for as long as you can manage before withdrawing the next instalment.
Use a reliable company
Companies registered with Equity Release Council are required to sign a ‘no negative equity’ guarantee which ensures that your estate doesn’t owe more than the house is worth.
What happens after death?
After the borrower dies, their house is sold. The proceeds from the sale are first used to pay off the solicitor and agent’s fees and the remaining amount is used to pay off the loan. What remains after these expenses is passed on to your beneficiaries. However, if your estate has sufficient funds, your executor may retain the property and pay off the loan without selling it.
Equity release must be used with caution as there is a property at stake. But it is nevertheless a good financial tool to raise quick capital.