Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 19/03/2019

How could equity release affect my family? FAQs

Will equity release impact my spouse or partner?

If you are married or in a civil partnership and take equity release together, then both of you can stay in your own home until you die or go into long term care. This means that if one of you needs to go into care, but the other wishes to remain in your home then this is allowed.
If only you have taken out equity release as the property is your sole ownership, then your partner whether you are married, in a civil partnership or not may not be able to remain in your home after you pass away or go into long-term care.

Can equity release be transferred?

It is possible to move home after you have taken out equity release. There are some equity release products (both lifetime mortgages and home reversion plans) that allow you to ‘port’ your borrowing from one property to another. There will be some important conditions as to the types of property and the value of these that will be acceptable to the equity release provider. You should speak to your equity release provider before planning any moves.

Will equity release affect inheritance?

If you take out equity release and don’t pay this back while you remain in the property, then your beneficiaries will get less that the total value of the sale of your home when it is sold. There are two ways to reduce the impact of equity release on inheritance. This includes selecting an equity release product that allows you to pay back what you have borrowed and thereby reduce the amount the lender will need to be paid from the sale of your home. The second is to choose a protected lifetime mortgage, this allows you to protect a proportion of your property’s future value for your beneficiaries to inherit.
You should also make sure your equity release product has a no-negative equity guarantee. This guarantee means the amount you own will never be greater than the value of your property when it is sold. However, this could mean you don’t receive anything at all, it only protects you from a loss.

Equity may also affect how much inheritance tax your beneficiaries will have to pay. When you take out equity release, this will reduce the value of your estate and could therefore reduce any inheritance tax due.

What happens if I pass away soon after taking equity release?

If your equity release product has completed and you have received the funds, then your beneficiaries will be bound to repay the equity release loan. If you have taken a lifetime mortgage, then most lenders will allow up to 12 months for your beneficiaries to repay the loan. During this time interest will continue to accrue. If there are any unused funds from the equity release paid-out, then these could be used to reduce the overall loan.

Would my partner have to move when I pass away?

If you are married or in a civil partnership and have taken equity release together, then your partner could stay in your home after you have passed away.

Can equity be repaid before I pass away?

There are lifetime mortgages that allow you to pay back what you have borrowed plus the interest. You can choose to pay back part or some of the total amount. Home reversion plans do allow you to buy back the share of the property you have sold, but it will be at the full market rate. This means you will pay the equity release provider more than you received for the share.
If you are able or want to reduce the impact of interest being added to your loan then you could consider a retirement interest only mortgage instead – these generally have lower rates of interest.

 

How does equity release work?

Find out what the difference is between lifetime mortgage and home reversion plans in our guide to equity release.

Tax, interest and finance FAQs

Does equity release affect tax credits, benefits or pension entitlement?

Equity release could increase your income and savings, and this means your entitlement for means-tested benefits could change. If you receive the state pension this will not be impacted by taking equity release. There are other benefits though that will be affected your level of income and/or savings increasing., these include pension credit, universal credit and council tax reductions.

Does cash I release from my home get taxed?

The cash lump sum released from your home is tax-free. However, if you decide to place this money in a savings account, secure a regular income through an annuity or make an investment, tax may then be payable on any interest, income or gains you receive.

How does equity release interest work?

If you take a form of equity release called a lifetime mortgage, then you will incur interest on the amount you have borrowed. Interest is charged either every month or year depending on your product’s terms and conditions. The interest you pay is calculated as a percentage of the amount you have borrowed plus any interest already accrued. If you do not pay back any money towards what you owe, then this interest will only increase each month or year. Equity release providers refer to this as ‘rolled up’ interest, but it is also known as compound interest. Here is an example to explain how it works.
You borrow £50,000, you pay 5% interest per year. At the end of year one you will accrue £2,500 in interest. This is added to your borrowing totalling £52,500. At the end of year two, you pay 5% interest on the total from the end of year one (£52,500). Your interest in year two is now greater at £2,625.

The effect over many years can be dramatic:

Year Amount owed at the start of the year Interest costs from the start  of year one Total owed at the end of the year
One £50,000 £2,500 £52,500
Five £52,500 £13,814 £63,814
10 £63,814 £31,444 £81,444
15 £81,444 £53,946 £103,946

The table above is based on interest applied annually and shows that if you do not pay back any of your lifetime mortgage for 15 years, you will owe more than double the original amount borrowed.

Want to know more about how equity release works?

Find out more about the risks and benefits of equity release in our guide to equity release.

How will equity release affect my home? FAQs

Will I still own my own home?

For a lifetime mortgage, yes you will always be the owner of your home. Your equity release lender is only using your property as security to repay back what you have borrowed. For a home reversion plan, you are selling part or shares of your ownership to the equity release provider.

Can you sell your house and still live in it?

You can use a home reversion plan to sell a share or all of your property and still be able to live there until you die or move into long-term care.

Can I move home if I want to?

Some equity release products are portable from one property to another. This includes lifetime mortgages and home reversion plans. The equity release provider will have some conditions that your new home will need to meet, such as the location, condition and value of the property.

Does equity release mean I am renting my home?

If you choose an equity release lifetime mortgage, then you retain full ownership of your property. If you choose a home reversion plan, then because you sell a share or all of your property to the equity release company you will become their tenant. You will not have to pay rent to your home reversion provider.

What if I don't need all the money I can get through equity release right?

You could choose a drawdown lifetime mortgage. This is where the lender will approve you for a total amount you can borrow – sometimes called a ‘cash facility’. You can then take an initial sum from this followed by additional sums at a later point. Interest is charged only on the amount you borrow, from the date you receive it, not the total amount you have available.

Can I do what I want with the money?

How you choose to spend your money from equity release is entirely up to you. You could choose to pay off any remaining mortgage or other debts and free up some income every month, help your family members to either get onto the housing ladder or to buy a larger home, to make home improvements or treat yourself to a holiday.

Could I end up woing more than the value of my home?

Lifetime mortgages from those providers who are members of the Equity Release Council (the trade body) include a ‘No Negative Equity’ guarantee. This means that the amount owed will not exceed the value of your house when it is time to sell it. The worse case scenario is that there is no equity left.

Want to move forward and speak to an adviser?

Our preferred broker MCB Financial Services can provide you with impartial and expert advice to find the right equity release choice for you.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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