How equity release is impacting later-life planning
People in later life are unlocking the value of their property and turning it into a lump sum, but how does equity release affect the inheritance of your family?
UK residents are living longer and healthier lives, meaning that it is not uncommon to look for different sources of income on top of a pension. Many people are turning to their homes as a means to receive a lump sum of cash to fund a better way of life in their retirement.
A recent report from industry trade body the Equity Release Council showed that 51% of homeowners aged 45+ see money invested into property as part of their later life financial plans. In addition to this, 44% felt that taking out a mortgage or loan to access property wealth in later-life is becoming a “more common way” to manage money.
With an increasing appetite to release large sums of cash from property in retirement, how exactly will UK residents’ estates be affected? Will inheriting large estates become a thing of the past? Here, our experts answer all of your questions surrounding equity release and how it might affect inheritance.
What is equity release?
Equity release is the process of “unlocking” the value of your property and turning it into cash. There are a number of ways this can be carried out, and you do not have to have a fully paid mortgage to do so.
Many choose to take this cash in the form of a one-off lump sum or in several instalments, on which you may pay interest.
Equity release is only available to those who over 55.
What types of equity release are there?
There are two types of equity release options:
1. Lifetime mortgage
2. Home Reversion Plan
The lifetime mortgage is the most popular form of equity release. Here, you will borrow some of your home’s value from a provider at a fixed or capped interest rate.
The difference to a normal mortgage, however, is that you do not normally have to make any repayments while you are still alive.
Instead, the interest that is owed “rolls up” over time, meaning unpaid interest is added to the loan. This means that the debt can increase quite rapidly over time.
Home Reversion Plan
For this type of equity release you need to be 65+.
An equity release provider will pay you a tax-free lump sum for a portion of your home, at below market value. You will then live in this home until you die, rent-free.
Once you pass away, the house will be sold and the proceeds are split based on the percentage you own and the percentage the equity release provider owns.
If, in that time, the property value rises, so does the amount that the lender gets, in keeping with the percentage split.
The main difference between the two is the fact that the price stays the same with a lifetime mortgage, in that you know what the interest will be. With home reversion plans, the price of the equity release is dependent on the price of the home when you come to sell it, which may be worse for your estate if the value of the property has risen significantly.
How does equity release affect my family’s inheritance?
If you are thinking about equity release, you will need to consider how it might affect the value of your estate and, therefore, the value of your family’s inheritance.
Equity release will severely reduce the value of your estate. This is due to the fact that you are borrowing money from your estate, along with any interest, which will have to be paid off when you die.
This means it will reduce the value of your family’s inheritance drastically. There will be less value within the property for your family to benefit from when you come to divide your estate.
It will also be impossible to leave a property to a loved one in your will, as the rules of equity release state that the property must be sold when you pass away.
The good news for your family is that all equity release plans that are sold by members of the Equity Release Council have a “no negative equity” guarantee written into them. This means that you will never owe a lender more than the value of your house, meaning that your family will not be in debt once you pass away.
How do I limit the effect of equity release on my family’s inheritance?
There are types of plans which can limit the amount of equity that is taken. For example, drawdown plans can provide a compromise between taking value out of the property, while also retaining value for your family’s inheritance.
In a drawdown plan, a lender will offer you a “cash facility”, e.g. a limit of £100,000. This facility is there for you to use whenever you see fit, and you will only pay interest on the amount that you borrow.
If you only need £10,000 for the time being, that’s all you pay interest on. If you need another £50,000 over time, you can do so, but you will only pay interest on whatever you owe at that given time, meaning you will accrue less interest over the lifetime of the mortgage.
In addition to this, there are now voluntary repayment lifetime mortgages, where you can repay up to a maximum of 10-15% of the original amount borrowed, with no penalty. This can be useful for those who cannot commit to making regular interest repayments.
How can Percy Hughes & Roberts help with equity release?
At Percy Hughes & Roberts, we understand that each and every family is different. Many UK residents over 55 are taking out equity release plans, and it is affecting families in different ways.
While our solicitors do not offer equity release financial advice, we can offer you guidance in relation to your estate, your family’s inheritance, and how equity release can alter this significantly.
You will need to speak to a qualified wills and probate solicitor in order to fully understand how equity release may affect your estate and your family’s inheritance.
Percy Hughes & Roberts has team of expert wills and probate solicitors who are ready to talk to you about any aspect of later life planning. Our team can also discuss updating your will if you do decide to take out an equity release plan.
If you need assistance with probate, writing a will, making a change to a will, or simply want general advice, our Wirral Wills and Probate solicitors have a wealth of experience.
Contact Percy Hughes & Roberts
To speak to a wills and probate solicitor for advice, contact Percy Hughes & Roberts for a no-obligation phone consultation today. We provide ourselves on offering expert advice that's easy to understand, and we will be with you through every step of the legal process.