Are You Worried That Your Heirs Won’t Get What They Deserve?
As you might have heard, mortgages are some of the most popular forms of borrowing money. However, mortgages come with cons as well. When you take out a lifetime mortgage, your family’s inheritance might be affected.
We’re going to tell you how your lifetime mortgage can affect your family inheritance, leaving no stone unturned.
What effect can equity release and mortgages have on your family’s inheritance? How will your heirs be affected? Let’s have a look at the effects of your decision to take out a lifetime mortgage. But don’t worry, there are ways of leaving an inheritance with equity release.
If you haven’t taken out a mortgage yet, here’s what you should know about how does equity release work.
Should I Release Equity?
The question you need to ask yourself is this: am I struggling to find the extra cash? Another good question is: how old am I?
If you’re older than 55 and you’re struggling to get some needed money, then equity release is a good option for you. You might also be considering equity release as a means to a more comfortable or luxurious retirement. However, as with anything in life, it’s always good to view the full scope of things before making rash decisions.
Adverts may be selling equity release as the next best thing. However, it’s not for everybody. Let’s run through everything you need to know about equity release, how it works and if it’s for you or not.
What Is Equity Release?
Equity release refers to your property’s items/parts that let you access your money tied up in your house. However, you can only gain access once you’re 551 years or older. You can get the capital value of objects in your home as a lump sum or an income based on the house’s value. You’ll just need to repay that money you accessed at a later stage.
Ask yourself this:
Have you been struggling to meet your lifestyle needs, or you need some extra finances to cater to your lifelong dreams? Are you a UK resident, over 55 years, and own a homeowner worth more than £70,000?
If yes, head on over to your financial adviser and start making plans towards taking out an equity release plan. Equity release allows homeowners to achieve their future financial desires by unlocking the equity tied up in their property.
As we’ve said before, it’s a secure way to release money that you’ll pay when you die or move into residential care. Its process is also straightforward and easy to understand. That said, here’s a comprehensive guide on the equity release application process.
Typically, the equity release process can take between 4-6 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.
How Does It Work?
Want to know more detail? There are two kinds of equity release options for you to choose from.
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 ringfence part of your property for your family to inherit.
You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
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 sum for it, but they can also pay you in regular payments. It’s your choice.
Let’s talk more about the effects of equity release lifetime mortgage on your inheritance.
How Is Your Inheritance Affected By Equity Release?
As you know, you can release equity that’s locked up in your home. Now that we have covered equity release and the types of equity release, we will look at the types that affect your inheritance: as you might know, your mortgages should come with a no negative equity guarantee. So you’re never off more than what your house is valued at.
If you end up borrowing money over a long period to release equity, you may owe as much as the value of your house. Now, let’s consider another way to save money to keep your inheritance at the highest value possible: Minimizing interest.
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.
Let me tell you something else:
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.
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?
BBecause 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.
Listen to this:
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. Meaning, if you sell 40% of your home with a value of £200,000, you’ll get less than £80,000 of its current worth.
Want to know more about the pros and cons of equity release? Read on.
Equity Release Pros
- You can choose a life that works by taking a secured property-based loan.
- You can choose a home reversion plan which works by selling a portion of your property to an equity release company.
- These plans give you the financial freedom to take cash from the equity in your home and spend it any way you like.
- A home reversion provider sometimes allows you to ringfence some value of your home. That way, you can be sure that your heirs will get a portion when you’ve passed on. You can repay by making payments towards the loan interest or letting the monthly interest roll-up.
You might be wondering, “What if my heirs want to keep my home?”
Can Heirs Keep the Property Money 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 in stamp duty tax (or SDLT).
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.
But let’s ask the central question: how does lifetime mortgages affect inheritance?
How Do Lifetime Mortgages Affect Inheritance
Many people are afraid that equity release will remove your inheritance altogether. However, equity release isn’t really the big bad wolf it might seem. The truth is that lifetime mortgage providers and home reversion plan providers want to make a reasonable deal with you that will suit both you and their business.
People choose to give their inheritance2 to the family by taking equity from their house. Monetary gifts like this are a great way to ensure your family will receive an inheritance. Now, 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, and leave the means to allow them to keep the house too.
It might take a bit of extra planning, but you can leave your heirs a large inheritance and the house you used to obtain such a sum.
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.
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.
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.
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, please give us a shout! We’re always here to assist you.