Are you considering releasing equity with a lifetime mortgage, but you’re unsure of how it may impact you and your loved ones?
Worrying about how your lifetime mortgage will affect your children’s inheritance is a legitimate concern. Therefore, it’s important to do all your research before deciding if equity release is the right decision for you and your family.
Luckily, we’ve unpacked all you need to know about how taking out a lifetime mortgage can affect your heirs.
Continue reading to find out more!
Will Equity Release Still Allow You to Leave an Inheritance?
Your equity release and lifetime mortgage can affect your family’s inheritance, but don’t worry, there are still ways of leaving an early inheritance, even if you go this route. Let’s have a look at the effects of a lifetime mortgage.
Lifetime mortgages are some of the most popular forms of borrowing money. However, they do come with disadvantages as well.
If you haven’t taken out a mortgage yet, here’s an insight into how equity release works.
3 Questions You Should Ask Yourself First
- How old am I?
- Am I struggling to find the extra cash?
- Should I release equity?
Now, do you think you can leave an inheritance if you get a lifetime mortgage?
It’s always good to get a better perspective on equity release before making your final decision.
Adverts may be selling equity release as the next best thing. However, it’s not for everybody.
What Is Equity Release?
Equity release refers to a financial product that allows you to unlock the cash tied up in your house. However, you can only gain access once you’re 55 years or older.
You can get the capital value in your home1 as a lump sum or an income based on the house’s value. The loan, plus interest, will be paid back from the sale of your home when you pass away or move into long-term care.
Equity release is a secure way to release money that you’ll pay when you die or move into residential care2. Its process is also straightforward and easy to understand.
Discover: What’s a Lifetime Mortgage
Are you aware of the equity release application process?
Typically, the equity release process can take between 4-12 weeks to be completed. However, there have been cases where it was completed in just 18 days. This affords you peace of mind and the ability to use your equity release sooner than needed.
Learn more about the Equity Release Process
To Equity Release or Not to Equity Release? That Is the Question.
Are you aware of the two types of equity release? You can choose from a lifetime mortgage or a home reversion.
What Is a Lifetime Mortgage?
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ring-fence3 part of your property for your family to inherit, which means it cannot be used for anything else or get taken away.
You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest4, it’ll be paid back when you pass away or need long-term medical care.
What Is a Home Reversion?
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum5 for it, but they can also pay you in regular payments. It’s your choice.
Let’s talk more about the effects of an equity release lifetime mortgage on your inheritance.
Effects of Equity Release on Your Inheritance
Now that we’ve covered the different types of equity release, we will look at the types that affect your inheritance.
If you end up borrowing money over a long period to release equity, you may owe as much as the value of your house. This means that your children won’t have any inheritance if you don’t have any further assets.
There is a way to ensure inheritance, as we will discuss later in this article.
Minimizing Interest Costs
If you decide to take out an equity release plan, you can release cash as and when you need to. What does this mean for you?
This means that you won’t have to pay interest on the whole amount of the loan. This approach can help you save money in the long run, meaning your inheritance won’t decrease as much.
But, please be aware that this doesn’t guarantee that you’ll have an inheritance left for your heirs.
Some lifetime mortgages will let you repay the interest every month. If it’s possible and you can afford it, this option will help you only with what you originally borrowed.
As a result, you’re most likely to end up leaving an inheritance for your family.
Are you curious about what the current rates are?
Check out our article on Equity Release Interest Rates.
The Home Reversion Plan
Home reversion plans are the second type of equity release. With a home reversion plan, you have to sell a part of your home.
Why is this important?
You’ll be guaranteed to be able to leave some money for your family as an inheritance.
For example, if you apply for a scheme and sell 40% of your house, the equity release provider will be owed 40% of your property’s market value at the end of the scheme period.
So what does this mean?
This means that 60% of your property will be available as an inheritance for your family.
For example, you’ll have to bear in mind that the money you get using equity release, through home reversion specifically, will be at an increased market value of the property you sold. This means that if you sell 40% of your home with a value of £200,000, you’ll get less than £80,000 of its current worth.
You might be wondering if your heirs can keep your home.
Can Heirs Keep the Property That It Was Borrowed Against?
If your heirs want to keep the property, instead of having the provider sell it to repay the loan, they may choose to repay the sum owed using other parts of your estate or by any other means. In this instance, your family will then be able to hold on to the house without incurring stamp duty tax (or SDLT7).
A better option for your heirs to keep the family home
Your family can also buy the property directly from this date. In this case, you’ll be able to use any money or financial means, including residential or buy to let mortgage. Just be aware of any stamp duty tax that could be due.
Leaving an Inheritance With Equity Release
Many people are afraid that equity release will remove your inheritance altogether. However, equity release can be used to your advantage and help you to leave an inheritance.
It is possible for lifetime mortgage providers and home reversion plan providers to make a reasonable deal with you so you can leave an inheritance.
Figure out how lifetime mortgages can affect inheritance.
People choose to give their inheritance to the family by taking equity from their house. Monetary gifts8 like this are a great way to ensure your family will receive an inheritance.
If equity release is managed correctly, it will be possible for you to leave a significant lump sum to your family when you pass away. You can have the means to allow them to keep the family home too.
It might take a bit of extra planning, but you can leave your heirs a large inheritance and the property you used to obtain such a sum.
If you want to know more, check out our article on Giving Your Family an Early Inheritance.
Got Questions About Lifetime Mortgages & Inheritance? Check These First
Do Lifetime Mortgages Reduce The Value Of Your Estate?
Your house is most likely the biggest asset you own and probably represents most of your estate when you pass away.
This can affect and reduce the value of your inheritance by the initial amount of your lifetime mortgage and any interest and charges accrued.
Does Equity Release Lifetime Mortgages Affect Inheritance Tax?
If the released equity through a lifetime mortgage is given away, it’ll be treated as a potentially exempt transfer.
It’ll be free from inheritance tax if the giver survives more than seven years after making the monetary gift transfer. On death, the debt plus accumulated interest will be repayable.
What Happens To My Heirs And My Lifetime Mortgage When I Die?
When you die or need long-term care, your property gets sold by your provider, and the sale money repays the loan.
Any money that’s left goes to your heirs. If your inheritance can pay off the mortgage without selling your property, they can choose to do that.
What Happens If You Inherit Property With A Lifetime Mortgage?
You usually have a few options when you inherit a property with a lifetime mortgage. You can sell it to repay the mortgage and keep the rest of the cash for your inheritance.
You can also control the home and use other means or assets to repay the mortgage. Sometimes, you can make payments on that loan as it is.
It’s possible that mortgages can reduce a person’s inheritance or estate. However, when managed correctly, they don’t have to. Your family can receive a generous inheritance once you pass away.
If you’re still unsure, get a professional equity release adviser to guide you!