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How Does Equity Release Work When You Die
Equity release represents a range of arrangements that allow you to leverage your home to obtain funds while still living in it.
It includes such products as lifetime mortgages, retirement interest-only (RIO) mortgages, home reversion plans and HELOC (Home Equity Lines of Credit).
But what actually happens and how does it work? At Clifton Private Finance, we’re here to explain how equity release works when you die.
And to speak to an adviser about whether equity release is a good idea for you, you can book a free consultation below.
Table of Contents
How Does Equity Release Work When You Die?
The Surviving Spouse or Partner
The Debt on the Estate
Selling the Property
The ‘No Negative Equity Guarantee’
The Lender’s Interest in the Sale
Final Inheritance
An Example of How Equity Release Works When You Die
Equity Release Mortgages with Clifton Private Finance
How Does Equity Release Work When You Die?
Equity release provides you access to money that is tied up in your home, in exchange for a contract that states that you are able to continue living in the property until it you no longer need it, at which time, the money and any interest are repaid in full.
Equity release is a very powerful and helpful way for older people who have paid off their mortgage in full to have some extra money in retirement.
However, the downside of equity release rests with the estate, as it is upon your death that the money has to be repaid to the lender, and in some cases, that total can be significant.
In this guide, we break down exactly how it works and all the factors involved.
How the interest works
Most equity release products are loans, and like any loan, interest is added monthly until the loan is repaid.
As equity release has no monthly repayment schedule, that interest simply builds up and up in the background, waiting for the time when it is to be repaid in full.
This means that the length of time that passes between the equity release mortgage being provided and the time of your passing away is a key factor in determining the interest.
If you survive fifteen years after taking out a £100,000 lifetime mortgage at 5%, the total balance will be £211,370.39; at twenty years, it’s £271,264.03.
This can seem like a shock to the system, however, it can also be true that the value of the property increases over that time. If the £100,000 lifetime mortgage had been taken out on a house valued at £400,000 in 2005; it would be a debt of a little over £270,000 in 2025, but the house itself could have potentially tripled in value, given experience over the past twenty years, meaning it would be worth £1,200,000. The interest on the mortgage is simply dwarfed by the increase in house value.
Of course, no one can guarantee anything regarding the future of the UK housing market; however, it is fair to say that house prices have always risen as the years pass, typically outstripping the interest rates on loans.
The Surviving Spouse or Partner
The terms of the lifetime mortgage will be such that it only becomes due when the property is no longer in use by the mortgage holders.
In marriages and civil partnerships, the mortgage will be a joint commitment, which means the surviving spouse becomes the mortgage holder and the arrangement continues while they remain resident.
Surviving residents who are not part of the mortgage agreement will not have the right to remain in the property, however, and may find their home being sold ‘above their heads’.
This can happen if:
- The surviving resident is not a spouse or civil partner to the deceased. This includes partners with no legal standing, children and other family members, lodgers, and carers.
- The marriage or civil partnership occurred after the equity release mortgage was taken out. In this case, the change in circumstances should have been reported to the mortgage lender and the details amended accordingly; however, if that was never done, the surviving partner will be treated as if they have no legal right to the home and may find the mortgage lender unsympathetic. For this reason, it is absolutely essential that the lender is immediately informed of any changes in circumstance. Note that adding a spouse to a lifetime mortgage after it has been agreed may be complicated and in some cases involves a complete reassessment of the mortgage terms. Additional fees should be expected.
The Debt on the Estate
The mortgage repayment becomes due when the home is no longer in use by the resident lifetime mortgage holders. In most cases, this means upon death, though it can also be triggered when the resident leaves the property to go into full-time residential care.
However, if you have other assets or capital in the name of the estate that can be used to clear the debt, this is also sufficient for repayment.
As it is a debt held by the estate, it is the job of the executor of the estate to contact the mortgage lender and inform them of the change in circumstance, and to ensure the debt is repaid.
Selling the Property
Selling the property to obtain the funds is the responsibility of the executor.
There is no need to rush through a sale, put the house up for auction, or do anything else that might mean that less than market value is obtained for the property. The equity release mortgage contract will state how much time is provided to sell the home, typically between six and twelve months.
This is rare however, and good communication with the lender will ensure an amicable repayment will occur.
As stated above, until the debt is repaid, it will continue to generate interest. Sometimes holding out for a better deal is actually more costly than taking a lower offer.
The ‘No Negative Equity Guarantee’
One worry that many people have is that the balance of the lifetime mortgage will exceed the value of the house (known as negative equity), meaning the estate will continue to owe more to the mortgage lender than is received from the sale.
There will also be various clauses in the contract to protect the lender from the house being purposefully sold at a lower value than is fair.
The lender will conduct a valuation of their own and typically have the right to veto a sale that is significantly below that valuation.
Additionally, it is the legal responsibility of the executor to act in the best interest of the estate and its creditors - trying to sell the property for less than its value would breach that responsibility.
Ringfencing
One additional protection available is the idea of ‘ringfencing’. This involves protecting a percentage of the property equity from being used to repay the equity release mortgage. This will have been put in place at the start of the lifetime mortgage and will have had an effect on the size of the mortgage offered.
For example, a homeowner may wish to ringfence a quarter (25%) of the property and would stipulate this during the mortgage negotiation.
The value of the NNEG would consequently be set to 75% of the final property sale value.
Any ringfencing will be clearly stated in the mortgage documentation.
The Lender’s Interest in the Sale
While the mortgage lender does not typically take part in the property sale, they do have a vested interest in it and will exercise various rights. This includes:
- Being immediately informed - It is the executor’s responsibility to immediately inform the lender that the mortgage holder has passed away. This will initiate the repayment process.
- Independently valuing the property - The lender will undertake a separate property valuation to provide them with a full understanding of its expected sale price.
- Sale veto rights - The lender will have the right to refuse a sale it believes does not properly represent the value of the property.
- Setting a time limit for sale - The lender will have set a time limit (usually six to twelve months) for the sale of the home and repayment of the mortgage.
- Continued interest - Interest will continue to be added to the mortgage balance until it is repaid in full.
- The right to repossess - Should the time limit be passed, the lender may repossess the property and undertake its own sale. Should this happen, additional fees will be incurred and an expedient sale will take place that might not represent the full market value of the property. The lender will return to the estate any proceeds of the property sale that exceed the full balance of the mortgage, plus interest and any additional fees.
Final Inheritance
Once the balance of the lifetime mortgage has been repaid, the executor of the estate is free to share the remaining value of the estate to the beneficiaries as detailed in the will.
An Example of How Equity Release Works When You Die - 8 Steps
The following is a complete example of a lifetime mortgage.
The Background
Alex is 72, is in reasonable health, and owns his home outright. It is valued at £380,000 and he is looking to release £80,000 in funds to take his granddaughter, Esme, on a round-the-world-trip before she starts university, and then have money left in the bank to help her during her student years.
He is also concerned about leaving some inheritance for his family, and wants to ringfence a third of his property value.
Obtaining the Mortgage
With some independent advice and help, Alex manages to find a lifetime mortgage that fits his requirements at 5.8% APR (*example figure only). He agrees to the contract and releases £80,000 in equity.
A Fantastic Holiday
Alex and his Esme have a wonderful time travelling around the world. No expense is spared and they enjoy themselves thoroughly. On their return, Esme starts college and obtains her student financing. She doesn’t actually need too much help, but nonetheless, Alex passes her a little here and there to keep her comfortable.
Meeting a New Wife
Three years later, Esme has finished college and Alex has a new partner, Susan, who is only 68. They are married, and Alex informs the mortgage lender. Because Susan is younger and in good health, he has to renegotiate the mortgage and pay fees. The new rate has risen to 6.45% APR, which Alex and Susan accept.
A Decade of Bliss
Alex has a wonderful time with Susan for the next ten years. Esme and the other members of his family are doing well, too. There is nothing left of the original mortgage, but Alex and Susan have been happy with their pensions. Sadly, Alex dies at 85.
As executor, Susan informs the mortgage lender. As the joint mortgage holder, she has the right to continue living in the home and stays there alone. The balance on the mortgage stands at £154,433.64.
Susan’s Passing
Susan passes away two and a half years later. She had no family of her own prior to marrying Alex, and leaves the estate to Alex’s children and grandchildren. Esme acts as executor and immediately informs the mortgage lender that Susan has died. They inform her that the balance on the lifetime mortgage is £181,377.90.
Selling the House
Esme speaks to an estate agent and puts the house on the market for £700,000. Susan had let the house fall a little into disrepair in her final years, and the estate agent suggests that if Esme took the time to renovate a little, she could push the price to £750,000 or even higher. However, Esme is keen to just let the house be sold and move on.
Interest had continued to be added to the lifetime mortgage for those six months and at the time of sale, the balance owed is £187,306.50. The ringfencing that Alex had set up in the beginning doesn’t need to apply, as the balance is lower than that threshold (which would have been £453,333).
Settling the Estate
Esme immediately pays the outstanding £187,306.50. After fees and some other minor debts, the estate is left with £483,850. If the home had been passed directly to Esme as a family member, it would have fallen under the £500,000 threshold for inheritance tax and she wouldn’t have paid any; however, because it’s direct cash in the bank, the estate owes HMRC £63,540.
Esme pays this and the total value of the estate that she shares with her family is £420,310.
Related: Look to this case study to see how equity release can be used to minimise future inheritance tax.
Equity Release Mortgages with Clifton Private Finance
Clifton Private Finance are a specialist financial broker with dedicated mortgage advisory teams and partners that specialise in equity release financing.
Our partners are on hand every day to speak to you about the finer nuances of equity release, explain the products available, and work on your behalf to secure the best deals in the marketplace.
Contact us today to find how equity release can give your retirement an extra boost and see if it's an appropriate product for you.
