Inheriting a house with an equity release plan

Inheriting a house from a family member can be emotionally difficult. Alongside the practical matters that need to be dealt with, a home can hold years of memories and remind us of the people who called it home. There can also be financial complexities, for example, if the property has an equity release plan.  

Most equity release plans are lifetime mortgages, which are long-term loans secured against your property. When someone with a lifetime mortgage passes away or goes into long-term care, the lifetime mortgage ends and typically, the loan has to be repaid within 12 months.  If it’s a joint plan, the remaining borrower stays in the home and just needs to tell the lender about the passing of the other plan holder.

The amount due at the end of a lifetime mortgage includes:

• Original amount borrowed + further drawdowns + interest + any applicable charges or fees.

The lifetime mortgage is secured against the property rather than the beneficiary. This means the loan is normally repaid from the sale of the property or other estate funds before the home is passed on. Any remaining value can then be inherited by the beneficiaries.

What to do if you’ve inherited a house with an equity release plan

We appreciate that dealing with a bereavement can be a difficult time. This article provides an overview of potential next steps when someone inherits a home with equity release. The exact process can vary depending on the lender and the situation, the information provided should be used as an illustrative example only.

Once the executor of the Will has identified that the property has a lifetime mortgage, the next steps as the beneficiary usually are:

1. Tell the lender that the homeowner has passed away. You’ll usually need a copy of the plan holder’s death certificate.

2. Request a redemption statement from the lender (You or the solicitor handling the estate can do this). At Pure, we provide an online form to make this step a little easier. View the redemption statement process here.

   For Grant of Probate purposes, you’ll likely need the balance at date of death. To get this, you’ll need to provide us with a copy of the Will to verify that you’re entitled to this information.

3. The lifetime mortgage is reviewed to ensure that the terms and conditions were upheld.

4. Arrangements are made to put the property on the market. This doesn't usually need to happen immediately, but the property will normally need to be on the market within six months of the lifetime mortgage ending.

5. The house is sold and money from the sale is used to repay the lifetime mortgage in full, which includes interest, any further borrowing, and any applicable charges or fees.

Some important points to be aware of

• If you decide to keep the property rather than sell it, the lifetime mortgage will normally need to be repaid in full within 12 months. This will include any interest that has built up after the plan holder has died or entered long-term care.

• The no negative equity guarantee ensures that the estate doesn’t pay more than the property is worth.

• If it’s a joint plan, the surviving borrower stays in the home. You still need to tell the lender about the death of the other plan holder.  

• Interest on a lifetime mortgage works differently than that of a residential mortgage. Lifetime mortgage interest compounds. This means interest is added to the loan, and over time interest is charged on both the original amount borrowed and the interest that's already been added. Find out more about what compound interest is on our explainer page.

Understanding equity release 

If you’ve inherited a house with an equity release plan, you may find it helpful to spend some time learning more about equity release. A short definition is: “Equity release is a later life loan for homeowners aged 55 and over to access tax-free cash from their property's value while continuing to own and live in their home.”

You can find more information about equity release online from:

• Age UK’s Equity Release Factsheet

• The official trades body: Equity Release Council

• Informational sites like Money Helper or Citizens Advice

You can also explore our explainer pages on ‘what is equity release?’, ‘how does equity release work?’, ‘what is compound interest?’, and our ‘existing customer FAQs’.  

Frequently asked questions about inheriting a house with an equity release mortgage 

• Who is responsible for repaying the lifetime mortgage?

The repayment is taken from the estate, not from the beneficiaries. The beneficiaries aren’t personally responsible for the debt.

• How can an equity release affect what beneficiaries inherit?

A lifetime mortgage is repaid from the estate when the property is sold. Because the loan and any accrued interest must be repaid, beneficiaries may receive a smaller inheritance than they would have done if no lifetime mortgage had been taken out.

The existence of a lifetime mortgage can also make the administration of the estate more complex, as the loan will need to be settled as part of the probate process.

• Do I automatically inherit the house?

No, it depends if there’s a valid Will present, and what this details. If there isn’t a valid Will present, then the rules of intestacy take effect.  

If the house was owned jointly with a spouse as joint tenants, the surviving owner usually inherits the deceased's share automatically, regardless of whether there is a Will.

Different rules can apply if the property was owned as tenants in common, which is when two or more people own specified shares of a property, rather than owning it jointly as a single unit.

• Does the house have to be sold?

No, you can decide to keep the property, however, the lifetime mortgage will need to be paid off, usually within 12 months. Interest will accrue until the mortgage is redeemed as per the original terms and conditions.

• Do I receive any money from the sale?

Potentially. A lifetime mortgage allows the homeowner to access some of the value of their property while they are living. Those funds are received upfront and are not available again when the property is sold. When the property is eventually sold, the sale proceeds are used to repay the lifetime mortgage and any interest that has accrued. Any remaining money will form part of the estate and may be passed to beneficiaries in line with the Will or the applicable legal process.

• Could there be nothing left from the sale of the house?

In some cases, yes. A lifetime mortgage, plus any interest that has built up, is repaid when the property is sold. If the mortgage has been in place for a long time, the amount owed could be a significant proportion of the property's value. In some circumstances, this could mean there is little or no money left from the sale after the mortgage has been repaid.

• Does interest keep building after the plan owner has died?

Yes, the interest continues to accrue until the plan is fully redeemed. However, the no negative equity guarantee ensures that the estate doesn’t owe more than the property is worth. As a beneficiary, you aren't responsible for repaying the lifetime mortgage or the interest yourself. The estate is used to repay the debt.

• What happens if the equity release is more than the house is worth?

Lifetime mortgages come with a no negative equity guarantee as standard, which means no one ever owes more than the value of the home. The guarantee depends on the terms and conditions of the lifetime mortgage having been met. If there are any outstanding issues relating to those terms, these would need to be addressed as part of the estate administration process. Beneficiaries are not expected to settle any outstanding debt. 

• Does equity release impact inheritance tax?

A lifetime mortgage is a loan secured against your home, so it will usually reduce the value of your estate and the inheritance you leave behind. If you choose to give some of the money released to family or friends, those gifts may fall outside your estate for inheritance tax purposes if you survive for seven years after making them. If you die within seven years, the gifts may still be taken into account when calculating inheritance tax, depending on the value of your estate and your individual circumstances. In general, gifts made more than seven years before death are exempt from inheritance tax.

• What if the property takes a long time to sell?

The executor of the Will keeps the lender informed about the property and progress on the sale. Interest will continue to build during this time, however, the no negative equity guarantee ensures that nothing beyond the value of the home needs to be repaid.

If there’s evidence that the property is being actively marketed but isn’t selling, some lenders may extend the repayment period. However, the exact approach depends on the specific lender and product terms, so the mortgage offer and conditions would need to be checked.

• What if there’s no will?

If there isn’t a valid Will, the estate is dealt with under the rules of intestacy. As the lifetime mortgage is still a secured debt, it still needs to be repaid before the remaining estate can be distributed.

Have you inherited a home with a Pure lifetime mortgage?

If you’ve inherited a home with a Pure Retirement lifetime mortgage, you can contact us through our online form. You can also browse our page for existing customers to find out more.