Yes, using equity release will usually reduce the amount of inheritance you leave to your children, but there are options available to help you protect this and maximise the amount that you leave to your beneficiaries.
When using equity release, you are releasing one large cash sum from your home, which is tax-free and you can continue to live in your home until you die or go into long-term care.
You will pay a small monthly interest every month and then the lender will also recover their funds when they eventually sell your home on the open market. Any money left over after the sale will be passed on your children or beneficiaries as inheritance.
So in most cases, you are still left with an inheritance, but this is a little less since the equity release provider is taking a percentage of the property’s sale.
Of course, any money that you have left from the original lump sum that you did not spend can be passed on as inheritance too.
Lifetime mortgage plans are specifically run for the rest of your lifetime – so you can release equity and continue to live in your home until you die or go into care. You are able to benefit if the value of your property still goes up over the next 10, 20 or 30 years. So once all interest and fees have been paid to the equity release provider, the outstanding balance will be given to your children as inheritance.
With over 100 equity release products available in the UK, there are a lot of add-ons and variations you can apply for. For instance, many choose to add an ‘inheritance protection guarantee’ which allows you to select a percentage of the property value that you want to protect and save for your children.
For example: You can choose 40% of your property’s value will be used as inheritance.
There is often very little or no extra cost for adding this – however, it may affect the initial amount that you wish to release.
With a home reversion plan, you are essentially ‘selling off’ a percentage of your property – so whilst you can usually borrow a lot more with this type of scheme (up to 90%), you and your children do not benefit from future increases in the property price. You can, therefore, add protection plans or state that you want a certain amount put aside for your children to inherit.
If you can make voluntary payments, you will reduce the total amount of interest charged on your equity release loan. Sometimes making overpayments can incur a fee, so it is important to check the terms and conditions of your plan. But the more interest you can pay off overall, the less will be outstanding on the loan and therefore the more is put aside for inheritance.
It may be hard to come up with extra income to make voluntary payments if you are retired or not working, but if you are still actively working, then it feasible to make voluntary payments. Equally, if you have downsized or sold any assets such as your car, you can always put this towards paying off your equity release scheme.
With a drawdown lifetime mortgage, you only pay interest on money that you draw down. So rather than release £50,000 upfront, you may find that drawing down smaller amounts of £5,000 every few months is sufficient to your needs – and is also more cost effective. Therefore, you are only paying interest on finance that you actually use. Again, if you can reduce your overall interest repayments, you will maximise your inheritance for your children.
No, every lender is required to include the no negative equity guarantee scheme, which means that you will never pay more than the value of the property. This is a ruling imposed by the Equity Release Council.
So even if your property value has not increased over the years or has even depreciated in value, the lenders will usually just write this off and there will not be any debts left for your children to pay.
You can give your children money pre-inheritance
More and more customers are using equity release to give money to their children before they die, rather than afterwards. Known as ‘gifting,’ many borrowers release equity and give their children funds for getting onto the property ladder, buying a new car or for spending money on their grandchildren.