If you are considering signing up for an equity release scheme, it’s worth thinking about what the possible impact could be on your ability to leave an inheritance to your family – especially if your home is your biggest asset.
How equity release can diminish an inheritance
When you raise money through equity release, you get a lump sum or regular cash payments on the proviso that the scheme provider is repaid when you die (or move into long-term care).
This usually involves selling your home in order to pay the equity release bill – and this means your family will not inherit it. If there is money left over from the sale, however, this can be passed on to your beneficiaries.
So what steps can you take to safeguard some level of inheritance?
Alternatives to equity release
Different types of equity release plan
The type of equity release scheme you sign up for can have a significant impact on what inheritance you can leave. The most common type of plan is a lifetime mortgage: this means you borrow money against the value of your home but the capital and interest is only repaid when you die or move into care.
With a lifetime mortgage, reputable providers should offer a “no negative equity” guarantee: this means that the total of what you owe can never exceed the value of your home.
Nonetheless, if you borrow through equity release over a long period, it is feasible that you could end up owing as much as your home is worth.
Types of equity release explained
Minimising interest bills
If you choose an equity release plan with a “drawdown” option, you can release money as and when you need it.
This means you won’t be paying interest on the whole amount from the start; an approach that can help keep bills under control. However, there is still no guarantee you’ll be able to leave an inheritance.
Some lifetime mortgages will allow you to pay off interest monthly as you go. If you can afford it, this option means that you will only ever owe the original capital sum that you borrowed. As a result, you’ll be more likely to be able to leave an inheritance.
The pros and cons of equity release
The home reversion option
With a home reversion scheme, you sell a part or all of your home to the equity release company while retaining the right to live in it for the rest of your life.
When you die or move into care, the company is paid out of the proceeds of the sale of your home.
But by selling a share of your property, you can guarantee that you will be able to leave at least some inheritance to your family.
For example, if you sign up for a scheme and sell 40% of your home, the provider will be owed 40% of the property’s market value when the scheme ends. This means 60% will remain to be passed on to your family as an inheritance (less any sale costs).
Bear in mind, however, that the money you raise through home reversion will be less than the current market value of the property share you are selling – so if you sell a 40% share in a home worth £200,000, you will get less (often considerably less) than the £80,000 this share is currently worth.
This is to reflect the fact that the provider will not get its money for many years.
Discuss with your advisor
It's worth noting that some plans do offer an inheritance protection which guarantees some inheritance would be left. If leaving an inheritance is important to you, then you should always discuss this with your adviser.