Equity release can be a good way to free up capital from your home without having to sell your property. But what happens when you both die or both need to move into long-term care?
At this point, your home is usually sold and the money remaining after agent and solicitor fees is used to pay off the loan. Any left-over proceeds go to your chosen beneficiaries.
If there is enough money in your estate to pay off the loan without selling the house, your executor may do this instead.
Most equity release plans now come with a guarantee against negative equity. In other words, the lender guarantees that your beneficiaries will not have to repay more than the value of your home, even if the debt grows beyond this amount.
Top 12 equity release legal questions
Here we look at some of the key concerns when considering equity release.
When can I take out an equity release loan?
Most products are only available to over-55s. The earlier you take out an equity release loan, the more it is likely to cost over time because of the accruing interest. Some plans do allow you to make voluntary partial repayments, helping you to mitigate the build-up of interest.
How much can I borrow?
Typically, the maximum is 60 per cent loan to value depending on your age, the value of the property and your life expectancy.
Can I use the money as I please?
Yes, you are free to spend the money on whatever you like, whether it’s living costs, home improvements, an early inheritance for your children or a luxury holiday. The only requirement is that you pay off any traditional mortgage or loans secured on the property when you take out the equity release plan. You can use some of the released equity to do this if you wish. Equity release can be an expensive way of borrowing, so consider other funding and investment options first if possible.
Can I make repayments?
There are two types of lifetime mortgages. One rolls up the interest at a fixed rate – agreed at the outset – and adds it to the loan amount to be repaid after you die or move into long-term care. The debt quickly adds up due to the compounding interest. The other allows you to make interest and sometimes even capital repayments while you’re still alive to keep the final costs down.
Will I still own my home?
With a lifetime mortgage, you will still be the legal owner of your home, but the lender will place a charge on the property title.
Can I move house?
Yes, moving house with equity release is possible as long as your equity release lender agrees that your new property is suitable security for your loan. This means that a lifetime mortgage can be used to help you downsize, rightsize, and even upsize.
Can my spouse or partner remain in the home after I die?
Yes, but only if the mortgage is written in joint names. If not, your spouse may be forced to sell and move out of the property after your death.
Can I take regular payments rather than a lump sum?
Traditionally equity release plans offer a single, lump sum payment, however there are some deals that allow you to take what you need initially and then come back for more cash as you need it. This way you’re only paying interest on money you actually need
What does it cost?
The cost of equity release, is dependent on the fees and charges associated and can add up to between £1,500 and £3,000. This includes things like legal and valuation fees, buildings insurance, arrangement fees and advice fees.
Will it affect my state benefits?
Taking an equity release loan could reduce any means-tested benefits you receive. Make sure you find out exactly how your benefits will be affected before signing up.
What happens if the lender goes bust?
Your loan will be sold or passed on to a new lender, which will be bound by the original terms of the loan and will not be able to force you to repay the debt sooner.
Can I change my mind?
You are not committed to taking out an equity release plan up until completion, but if you decide to repay the loan before the last homeowner either passes away or enters into long-term care, then early repayment charges may apply, which can be expensive. This depends on the plan you choose, with some plans being more suitable for individuals who wish to repay early, these may include features such as downsizing protection. It’s worth noting that all Lifetime Mortgages from lenders approved by the Equity Release Council are portable, meaning that you can move with the plan to a new property, as long as that property meets the lender’s criteria, so you don’t have to repay the loan early to move.
Find out if you could financially benefit from releasing equity from your home with the Telegraph equity release calculator.
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.