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Written by Emily Cross.
18 minute read
At a time when you may be coming to terms with a death in the family, financial affairs may feel like a distant priority. While we all deserve time and space to grieve, we also need to be aware of various responsibilities that may be placed on our shoulders during this time.
In this guide, we are going to explore the topic of equity release and what happens after death. If you are already reading our resources and actively considering funeral cover for parents in the later stages of life, you may wish to bookmark this guide for later, along with our inheritance tax guide.
Our aim here is to gently introduce you to some of the more technical aspects of getting a relative or loved one’s affairs in order after they have died. Some reading this may also be ready to start putting their own affairs in order while they are still alive with the aim of reducing the pressure surviving loved ones may experience. Regardless of your circumstances, we can help clarify your thinking.
Knowing what to do when someone dies may help to remove some of the pressure you are feeling and potentially even give you something to focus on.
Key takeaways:
Equity release is a way of unlocking some of the value tied up in your home, typically via a lifetime mortgage or home reversion plan. It is usually repaid from the sale of the property after you die or move into long-term care.
Important: Equity release is a regulated financial product. You should always speak to a qualified equity release adviser before making any decisions.
If you are aged 55 and over, equity release allows you to take out cash to the value of your home without having to sell it to a new buyer. An equity release loan is secured against your home using it as collateral and will then be repaid when you die or you have to enter long-term care. The two most common types of equity release are lifetime mortgages and home reversion plans.
A lifetime mortgage is a loan taken out against your home that will accrue interest over time. Because the interest compounds, you may find that you end up building up debt, which then needs to be paid off when your estate is handled after death. In contrast, a reversion plan involves selling your home there and then for a tax-free lump sum.
One of the key aspects of a reversion plan is that you will not take on debt–but it comes with the condition that you cannot release further funds in the future, whereas you have the potential to do so with a lifetime mortgage.
While many of us may not want to think about paying bills and settling debt even after we have died, the reality is that this is something that may well fall to those left behind. Giving a little thought ahead of time may give you the peace of mind that your relatives and loved ones are looked after once you are gone.
If the loan is secured against the property, the property will typically be sold to clear the debt. The executor of the will ensures that the property passes to the beneficiaries in line with the wishes of the person who has died. The beneficiaries inherit the property and are then responsible for making sure that debts are repaid before they can access the remainder of their inheritance.
Although your beneficiaries may choose to use other sources of funding, such as their own savings, to repay the loan, you may wish to make them aware of the arrangement at the earliest opportunity. Doing so can help remove an unwanted complication at a time when they may already be struggling with a deep sense of loss.
Most lenders will provide a 12-month repayment window during which time the interest is frozen. Depending on the lender and the specific terms of the agreement, they may then have the option to reactivate the interest, resulting in it accumulating further.
If the property needs to be sold to cover the debt, you may wish to contact the lender as your first step. Informing them of the date of death of the owner and your intention to sell will typically be done prior to contacting a local estate agent who will market the property for sale.
It is natural for a family home to have immeasurable sentimental value and for the surviving family members to want to keep it in the family. The beneficiaries of the will are responsible for repaying the loan, but they are not legally bound to do so by selling the property. If practically possible, they always have the option of using personal funds to repay the equity release.
Because of the tailored nature of equity release loans, you may find it helpful to contact the lender to clarify their repayment terms. They will be able to advise you on the timeline, whether a lump sum is required, or whether they are prepared to accept staggered installments.
Equity release, while a flexible option for the property owner, may cause complications for surviving relatives and beneficiaries who are already trying to cope with the death of a parent. This is especially the case if they were not made aware of the arrangement in advance.
If you have taken out an equity release loan, remembering the importance of writing a will and how it clarifies your final wishes may help communicate the finer points to your surviving loved ones.
An equity release loan is essentially a debt secured against a property, and this means that the outstanding loan reduces the total value of the estate. Rather than the home being worth its latest market valuation, it is now worth the sale price, less the total value of the loan and its associated interest.
Since the loan is repaid from the value of the property, this will likely reduce the amount passed on to loved ones. The earlier equity is released and the longer interest accrues, the greater this impact tends to be. It should also be stated that equity release may reduce the value of your estate and could affect your entitlement to state benefits.
All debts, including the equity release loan, have to be settled before the inheritance is distributed. The executor is responsible for informing the beneficiaries, and the beneficiaries will need to settle the debts before they can access the remainder of their inheritance. In some situations, it may be more practical for the executors themselves to take the lead on settling the debts, although this is a matter of choice for the family and all those involved.
Equity release debts will automatically form part of the estate, but they can be unintentionally left out of the will. The importance of updating a will to reflect financial changes cannot be overstated and it is what will ensure a timely settling of the estate and a redistribution of the inheritance to surviving loved ones.
If you are currently working through the various stages of this process, you may find our guide titled ‘what is probate’ helpful. And if you are considering how to structure your affairs to make things as easy as possible for your loved ones after you die, you may wish to bookmark it for future reference.
There is no definitive right or wrong way to settle this question when you are already coping with an unexpected death — only what is practical and suitable for each individual family. Selling the property through an estate agent will clear the debt, as the law protects against becoming trapped in negative equity…but it also means a home with significant sentimental value may be lost to the family.
An alternative option is to pay off the equity release with savings, life insurance of the person who has died, or some combination of the two. If you have access to suitable funds, this is something you may wish to consider discussing further with other members of the family. A period of reflection and seeking independent expert advice may also help you weigh up the various factors that are at play here.
Joint equity release loans are common when a legally recognised couple (through marriage or civil partnership) wants to release money from their home. These types of arrangements are set up so that when one borrower dies, the other can remain living in the home for the rest of their life. The only restriction on the surviving partner is that they will typically have to take responsibility for notifying the lender of the death of their partner.
The equity release loan will continue until the surviving partner dies or enters long-term care. Once they die, the loan will then have to be settled from their estate before the remainder of the inheritance is passed to the appointed beneficiaries.
When you start reading about loans, equity, and collateral, it’s natural to ask questions about just how big the associated debt can become. It may settle your mind to learn that there is a hard limit on how much the beneficiaries will have to pay out of the estate to settle the debts.
The borrowers or their surviving family will never owe more than the property’s sale value. This guarantee is a standard option offered on every plan approved by the Equity Release Council in the UK and is designed to prevent debt from passing down generations and impacting social mobility.
Because heirs are not left with additional debt beyond the home’s value, they are able to clear the debts of the person who has died without having to use their own money. By means of example, consider a home with a £200,000 equity release loan secured against it that only sells for £150,000.
In this case, the property value is unable to cover the full loan amount. The no negative equity guarantee prevents the outstanding £50,000 debt from being passed to the beneficiaries and forcing them to use their own savings or sell their homes to cover it.
What happens if the property sells for less than the loan?
The UK financial system is set up so that it becomes solely the lender’s responsibility to absorb any shortfall. The lender has to take the loss and there will be no extra financial burden on the estate or the beneficiaries. This means that the loan is only ever repaid out of the final sale price of the property, not from other items of value held by the estate. If you find that you require some additional financial support, you may find it helpful to consider applying for a funeral grant.
Because of the complex nature of financial planning over many years, you may find it helpful to seek independent expert advice from a financial planner. Doing so before taking out an equity release loan may help you understand your options and present you with other potential sources of funding.
While every financial situation is different, there are some common pitfalls and sources of complication you may wish to consider, such as:
One of the main sources of worry for surviving relatives is that they may have no idea what an equity release mortgage is. Making sure that it is laid out clearly in the will, and potentially considering discussing it with them while you are still alive, could help clarify things. Letting them know that they will not be obligated to sell their own home or use their savings to cover the debt can greatly reduce anxiety. You may find it also helps to let them know your reasons for having taken out the loan in the first place and how it has improved your quality of life and given you a greater sense of security.
We hope you have found some helpful, perhaps even comforting information in our guide. Dealing with complex financial issues such as equity release repayments is rarely easy at the best of times, least of all when you are trying to come to terms with the death of a partner or loved one. We understand this and are always here to help in any way we can.
Some families may feel they want to compare funeral plans, and that is an area we are happy to help with. We can also talk you through our range of direct cremation services if you want a more flexible way to pay your respects to someone who has died. And if you are planning for your own future and want to make the grieving process that little bit easier for those left behind, we can also assist with prepaid funeral plans to help provide peace of mind.
If you want to know more about how your funeral plan is cared for, our downloadable guide provides the details you need to feel confident. Discover the steps Aura takes to protect your funds and the regulations in place to keep your money safe.
Download our guide by clicking the link below and gain peace of mind for the future.
If you die with an equity release plan still in place, the outstanding balance (including any interest that has built up over the course of the plan) needs to be repaid to the lender. The most common way for this to be done is as a result of the sale of the property back into the market.
The person in charge of administering the estate of the person who has died will be set a deadline by the lender to oversee the repayment — typically within 12 months of the date of death.
An alternative route is for the beneficiaries named in the will to use other sources of funding, such as their own savings, to repay the equity release loan. In this case, they would then be able to keep the property and inherit it as normal.
Yes, equity release can most certainly affect inheritance, and understanding how this happens is important in many cases. Taking out an equity release loan against your property will reduce the overall value of your estate — your home is now more of a debt than it is a saleable asset or valuable item.
The outstanding balance on the equity release loan will need to be subtracted from the total value of the estate to arrive at the estate’s true net value. While this may reduce the amount of inheritance tax liability, it can also reduce the amount inherited by your beneficiaries and they will be responsible for settling the loan before claiming the remainder of their inheritance. If you are unsure about how to strike the right balance for your individual situation, you may wish to seek independent professional advice.
When you die, the equity release loan taken out against your property will typically be repaid by selling the property. If there is money left over once the loan has been settled (including interest that has accrued), the remainder will be distributed to your beneficiaries as outlined in your will. Making your beneficiaries aware that such an arrangement is in place may help reduce upset during an already difficult time.
In some cases, people use equity release funds to purchase a pre-paid funeral plan. However, this is a significant decision. Equity release is not suitable for everyone, and using it to fund funeral costs should only be done after:
Note: Aura is not authorised to provide financial advice on equity release. We recommend speaking to a regulated adviser listed on the FCA Register.
While you can certainly inherit a home that has an outstanding equity release loan secured against it, you need to be aware that you have a responsibility to repay the loan before you can claim your inheritance. If you cannot cover the loan and the interest that it charges with your own savings or liquid assets, you may be faced with the prospect of selling the property. If there is any money left over after the loan has been settled, it will be distributed in accordance with the will and form the inheritance of the beneficiaries.
The no negative equity guarantee is a legal mechanism that ensures when the property is sold, you will not owe more than the property is worth. It is essentially a cap on what you owe so that you can always settle your affairs. In the event that the property sells for less than what you owe, any shortfall that remains is automatically written off. This is important because, although beneficiaries are responsible for settling the loan before they can claim their inheritance, they do not become obligated to pay off the negative equity as well. The peace of mind that this provides may also make it a little easier to approach sensitive topics such as next of kin and funeral costs.
Yes, you can make partial repayments to reduce the interest rate you are charged, or you can make a full repayment that will clear the debt outright. One of the issues you may potentially face with both of these approaches is early repayment charges. This is when the lender charges you a fixed fee for making more than your minimum monthly payments so that they can counteract some of the interest payments they are missing out on as a result of the loan being repaid early.
It’s important to remember that what may work for someone may not work for you, and vice versa. There is no definitive right or wrong way to approach questions like this, but speaking with an independent expert may help you clarify your thinking. Some will highlight that an equity release loan can negatively impact the size of the inheritance you leave behind, while others will say that it is a potentially viable alternative to pension savings if you have property in your name.
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