Ensuring security as we get older is an important part of being able to live comfortably. For many people much of their wealth is tied up in the property in which they live. To be able to live more comfortably, increasing numbers of people are seeking to release money (“the Equity”) that has built up in their homes. This can give an amount of cash that can be used to enjoy retirement without financial pressures.
What is equity release?
Equity release enables you to tap into the money that has built up in the value of your property over the years. It is usually available to people who are over 55, and is, essentially, a lifetime loan, that is taken out against your property, and which is repayable when you die. If you jointly own your property, the loan is repayable when the last person dies.
The terms “Equity Release Mortgage” and “Lifetime Mortgage” are interchangeable but in effect mean the same thing.
On death, the Lifetime Mortgage is repaid from your Estate, but it is important that before you enter into an Lifetime Mortgage, you ensure that you have a guarantee that your Estate will not be liable if the value of your property has gone down, and there is not sufficient monies from the sale of the property to repay the loan. This is a common term in most Lifetime Mortgages and is known as a “No Negative Equity Guarantee”.
What happens when you die with a lifetime mortgage?
If you have taken equity from your property through a Lifetime Mortgage, this money is paid back to the lender only when you die. In most cases, a property will be sold when it’s owner(s) die and the money that was taken out paid back to the lender with interest. It is important to remember that the sting in the tail so far as a Lifetime Mortgage is concerned is that if you do not have to pay interest during the period of the Mortgage but the interest “rolls up” or “compounds”, and you will therefore be paying interest on interest. This can result in a significantly greater amount being owed when the Mortgage is repaid, than when the Mortgage was taken out. However, in all Lifetime Mortgages you do have the option to repay the interest as you go along which avoids the compounding effect.
Beneficiaries of an Estate will also often have the option of buying the property as long as they pay back the Lifetime Mortgage loan either from their own money or a separate loan or, in some cases, using capital that Beneficiaries have inherited from somewhere else in your Estate.
When do I need to pay back my lifetime mortgage?
As the name suggests a Lifetime Mortgage is normally paid back when you die or go into long term care. If you own the property with one or several other people it is paid back when the last surviving Co-Owner dies or goes into long term care. The monies would normally need to be repaid within 12 months of the death of the last surviving owner, or within 12 months of the last surviving owner going into residential care.
It is possible to pay off your Lifetime Mortgage loan before you die, but early repayment charges may apply. Ensure that you are aware of any penalties you may have to pay in this regard before you enter into a Lifetime Mortgage. Many Lifetime Mortgages today allow you to pay off capital as you go along, and if you do not pay more than a particular percentage a year, no penalties are charged. Often the amount is 10% of the capital each year.
Does my house need to be sold off to pay my lifetime mortgage?
It is common for a Lifetime Mortgage loan to be paid back when the property is sold. However this is not necessarily always the case. If you wish to downsize or move to another property it is possible that your Lifetime Mortgage is transferred onto your new Property. This is not guaranteed however and will depend on whether your new property provides adequate security for the Lifetime Mortgage.
What is a home reversion scheme?
A Home Reversion Scheme is different from a Lifetime Mortgage, as instead of securing a loan against your property, you sell a share of your property to the loan provider. This does not affect your right to remain residing in the property. In this case however, your property will partly belong to the loan provider and therefore when you die the property must be sold as quickly as possible.
If you enter into a Home Reversion Scheme it is essential that you advise your family and/or Beneficiaries of the arrangements so that they can organise things such as ensuring that the property is empty.
Whether you are taking out a Lifetime Mortgage or a Home Reversion Scheme it is in any event sensible to discuss these arrangements with your heirs and beneficiaries, so that they are aware of what you are doing and how this may impact upon your Estate.
What if I have a surviving partner?
If you have a surviving spouse/partner it is only natural that you want them to be able to continue to live in the property after you die. For this reason, when you take out a Lifetime Mortgage (such as the standard Equity Release Plan or a Home Reversion Scheme), it is necessary to ensure that your property is in the joint names of you and your spouse/partner and that the Equity Release Mortgage is also in joint names. This being the case, you will be able to ensure that your spouse/partner can continue to live in the property until either they die or go into long term care. There may also be an option for them to down size and transfer the Lifetime Mortgage to another property. This is not however guaranteed as mentioned above.
What if long term care becomes necessary?
If you are unable to live in your property because you require long term care, then under the terms of a Lifetime Mortgage your property will have to be sold, and the loan repaid. If you have a Partner who is not going into residential care, they will be able to continue living in the property until they also go into long term care or die, at which point the property will be sold and the loan repaid from sale proceeds.
Consulting a financial advisor
Before entering into any type of Lifetime Mortgage or Home Reversion Scheme, it is essential that you seek advice from an independent financial advisor who is preferably also a member of the Equity Release Council. Such an advisor will be able to provide you with impartial advice and in particular determine whether a Lifetime Mortgage or Home Reversion Scheme is best for you given all your circumstances. In addition, by being a member of the Equity Release Council an Advisor is obliged to adhere to the code of practice set out by the Council, in order to ensure that you are receiving the best independent advice that is available.
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