In recent years, equity-release mortgages have become a popular alternative to standard loans. They provide borrowers with a simple way to secure money and offer less repercussions than traditional debt, with stress-free repayment terms. But taking one on is still a significant commitment, and it’s wise to think through every aspect of the funding before you say yes.
One common area that potential borrowers are concerned about is how an equity release mortgage will impact family members. To make your decision easier, we’ve looked at just that, exploring the effects of this loan on you and your family.
What Is an Equity Release Mortgage?
Before looking into the impact on your family, you must know exactly what an equity release mortgage is. Simply put, it’s a shortcut to accessing money tied up in your property without selling it. You borrow against your own capital, allowing you to use the mortgage you’ve already paid off. Be aware, though, that you have to be 55 or over to access the loan.
One of the main perks of an equity release mortgage is that you don’t have to worry about monthly repayments. Your lender doesn’t expect any money back from you until you sell your home, whenever that may be. You’re under no obligation to sell, either, so you can live in your home for the rest of your life, never worrying about paying back a penny.
Two Loan Options
Two options are available if you’re interested in an Equity Release Mortgage. The first is a lifetime mortgage, which follows the above loan model of borrowing against your capital and paying it back when the home is sold. The lender will take a cut of your property’s final value, ensuring they get their money back with a bit of interest.
The second is a home reversion plan. In this slightly different model, you sell a part of your property to a home reversion provider upfront – usually between 20-60% of your whole house. When the property is eventually sold, the lender will cut further to bring their stake up to the total market price. As Online Money Advisor rightly say, “Most equity release experts do not recommend home reversion plans as lifetime mortgages are considered a better alternative since you don’t need to relinquish ownership of your home.”
Will an Equity Release Mortgage Reduce Inheritance?
Whether or not an equity release mortgage will reduce the inheritance your family receives upon your passing isn’t always straightforward. In one scenario, in which the mortgage isn’t paid off before your passing, and the compound interest grows faster than your property value, your family will receive less. Depending on how much you borrow, a chunk of your property’s final sale value will be used to pay off the loan.
However, it isn’t always this black and white. For example, there are plenty of scenarios where the property value increases faster than interest is added, leaving your family with a healthy sum of money left over once the loan has been repaid.
Using the loan to renovate your property may increase the value by far more than you borrowed. In these scenarios, there’s a possibility that your family will inherit more due to the investment in the property using the equity release mortgage than if you hadn’t taken a loan at all.
Will Your Family Inherit Debt?
Many safeguards are in place to ensure that your family members won’t inherit debt through equity-release mortgages. For example, any Equity Release Council lender member will offer a no-negative equity guarantee to protect your family.
Equity Release Mortgages Can Reduce Inherited Debt
If you need a loan, an Equity Release Mortgage could be the best way to keep your family safe in the event of your passing. Because the loan is paid back when your property is sold, so your family won’t have to spend any of their money on your debts, unlike other loan options. It’s a simple way to ensure your finances are in check now whilst not troubling your family in the future.
Talking to Your Family About an Equity Release Mortgage
Minimising the effects a loan has on your family is always important. Regarding an equity release mortgage, the best thing you can do is speak to your family. Let them know what the mortgage model is, why you’re using it, and how it will affect them in the future. Be sure they’re aware that they’ll receive less money from the sale of your property, and give everyone a chance to handle any issues that may occur in advance.
If your family is prepared to deal with the equity release mortgage, they won’t be in any difficulty after your passing or moving into care.
If you’re worried about talking to your family about debt or are unsure how to explain the mortgage, speak to a financial advisor. They’ll be able to arrange a meeting with you and your family, answering any questions and ensuring your loan is set up in the best way possible for all of you. Keeping everyone in the loop is always the best bet.
Final Words
There are tons of perks to taking out an equity release mortgage against the value of your property, but it’s wise to look at all of the impacts it’ll have before you sign the deal! Hopefully, this article has helped calm any concerns about passing on debt to your family. Remember, because the loan is paid back through the sale of your property, your loved ones will never have to pay a penny towards your debt.
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