After the death of the homeowner (or the last homeowner if a couple), the lifetime mortgage is repaid by the estate, typically by sale of the property. The proceeds of any equity remaining in the house are then distributed to beneficiaries named in the homeowner’s will.
The executor will inform the equity release provider of the death of the homeowner, and the loan will become due for repayment. Early repayment charges will not apply in this case. The lifetime mortgage contract will specify a period after the death of the homeowner for the executor to raise money to repay the loan by selling the property. This will depend on the lender, but is typically at least 12 months, but could be up to several years.
The loan can also be repaid by other means (such as other cash or marketable securities in the estate), so as to avoid selling the house, if it has sentimental value or another family member wishes to live in it. In this instance, the family would be able to inherit the property without being liable for Stamp Duty Land Tax. If the beneficiaries wished to purchase the property from the estate, or pay their own money into the estate in order to clear the debt and keep the property, SDLT may apply. Once the loan is repaid, the lender will contact the Land Registry and request that their records are updated to show that there is no longer a charge on the property.
Since Equity Release Council (ERC) lenders offer a no-negative equity guarantee, it is not possible for the value of the lifetime mortgage to compound and become greater than the value of the house. This means that borrowers can be certain that the rest of their estate will not be impacted by the need to repay the equity release loan. In addition, if the lifetime mortgage is greater than the property value, but the lifetime mortgage contract ringfenced 10% of the value for the beneficiaries, then the lifetime mortgage provider will only receive 90% of the home’s value.
Joint lifetime mortgages are ordinarily made on a ‘second death’ basis, meaning the loan is due for repayment only on the death of the second householder in a couple. However, there may be a significant life event exemption allowing repayment without penalty on the death of the first householder. This can be useful, if for example the second homeowner wishes to be closer to family, or to downsize.
It is important to understand the exact circumstances in which a lifetime mortgages can be repaid, and any charges that may apply, before releasing equity. It is also important to consider that, in the case where a couple live together but the equity release is in one partner’s name only, the loan will become due when that person dies. This could put the other person in the position of having to sell the property to repay the loan upon the death of their partner.
An equity release advisor will be able to advise you on the most appropriate lifetime mortgage for your needs and circumstances, including what will happen to your lifetime mortgage upon your death. Find the best equity release advisers near you in our equity release adviser directory.