If you are married, in a civil partnership or have a partner 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.
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.
If you take out equity release and don’t pay this back while you remain in the property, then your beneficiaries will get less than 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 once you have gone into long-term care or have passed away. However, this could mean you (or your beneficiaries) 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.
If your equity release product has completed and you have received the funds and only applied for this in your own name, 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.
If you took your lifetime mortgage out with a partner that survives you then the loan would not need to be repaid until they pass away or go into long-term care.
If you are married, in a civil partnership or have a partner and have taken equity release together, then your partner can stay in your home after you have passed 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.
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 could be affected by your level of income and/or savings increasing, these include pension credit, universal credit and council tax reductions.
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.
An adviser would not normally recommend you to place money from a lifetime mortgage into a savings account. This is because the interest earned on your savings will be less than the interest charged on your lifetime mortgage. Furthermore the interest charged on a lifetime mortgage will compound, this means that not only is the interest accrued on the amount you have borrowed, but that this also has future interest charged on top. Over time your debt increases.
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|
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.
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Find out more about the risks and benefits of equity release in our guide to equity release.
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.
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.
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.
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.
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 on the amount you borrow, from the date you receive it, not the total amount you have available. This amount will accrue interest, onto which further interest will be added. This compounding effect means that your debt will increase over time.
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. You should be mindful that a lifetime mortgage could cost more over the longer term so this should be considered carefully before consolidating any existing debts.
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 (when you pass away or enter long-term care). The worse case scenario is that there is no equity left.
Our preferred broker for equity release 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.