Inheriting a house with equity release: What to know
Inheriting a property with an equity release loan can be complicated, especially if you’re unsure how the loan works or what your responsibilities are. While you won’t personally inherit the debt, the loan must be repaid from the estate, often within 6 to 12 months. Whether you want to keep the property or sell it, it’s important to act quickly to protect its value.
This guide explains what happens when you inherit a home with an outstanding equity release loan, how interest and repayment work, and your options for selling or keeping the home. It also covers lesser-known features like inheritance protection and partial repayments.
Key points include:
- The equity release loan becomes repayable after the homeowner’s death, usually within 6 to 12 months.
- You are not personally liable, but the debt is secured against the home and must be settled.
- Most people sell the home to repay the loan, but you may keep it if you can repay or refinance.
- Compound interest causes the debt to grow the longer repayment is delayed.
- Some plans allow partial repayments or inheritance protection.
- You’ll never owe more than the home’s value, thanks to a no negative equity guarantee.
- The loan reduces the estate’s value for inheritance tax.
What is equity release?
Equity release allows older homeowners (typically aged 55 and over) to unlock value from their home without selling it. The most common type is a lifetime mortgage, which is repaid after the homeowner dies or moves into care. Interest is usually rolled up, meaning it compounds over time and increases the total debt.
Some plans may instead use a home reversion scheme, where the provider buys part of the property in exchange for a cash lump sum and sells it when the homeowner dies.
What happens when the homeowner dies?
When the last surviving borrower passes away, the equity release loan becomes due, including all accrued interest. Most lenders expect repayment within 6 to 12 months, though up to 24 months may be allowed in exceptional cases.
The property is typically sold to repay the loan. Any remaining value goes into the estate for distribution to beneficiaries. If the home is worth less than the debt, a no negative equity guarantee ensures neither you nor the estate will be liable for the shortfall.
The risk of interest accumulation
Equity release loans use compound interest, meaning interest is charged on top of previously accrued interest. This can dramatically increase the amount owed if the loan isn't repaid quickly.
Example:
A £150,000 loan at 6% annual interest could accrue over £750 in interest every month. A 6-month delay may cost over £4,500 in additional debt.
Acting quickly helps protect the estate’s remaining value, especially if you’re aiming to inherit or preserve equity.
What if I want to sell the property?
This is the most common route. The estate sells the home, repays the loan from the proceeds, and distributes what’s left to beneficiaries.
- You’ll need to liaise with the lender and provide documents like the death certificate and probate.
- If the home sells for more than the loan, the surplus is passed to the estate.
- If the sale is delayed, interest continues to accrue and reduces how much is left.
A fast property sale may help preserve more equity than waiting for a traditional buyer or market improvements.
What if I want to keep the property?
You can keep the inherited home, but you’ll need to repay the loan in full. Your options include:
1. Repaying the loan outright
Use personal funds or other assets from the estate to settle the debt.
Pros:
- You keep the property.
- No need to engage with new lenders.
Cons:
- Large financial outlay required.
2. Refinancing the home
You may be able to take out a residential or buy-to-let mortgage in your own name to raise the funds needed.
Note: You cannot continue the original equity release plan. A new agreement must be made in your own name.
3. Making partial repayments
Some newer equity release plans (particularly those from after March 2022) allow penalty-free partial repayments. While you’ll still need to repay the full amount eventually, this can reduce the total interest and preserve more value.
- Many lenders allow up to 10% of the original loan to be repaid each year without penalty.
- Always check for early repayment charges, especially on older plans.
If you're unable to refinance or repay within the timeframe, selling the property is usually the only alternative.
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Home reversion schemes and shared ownership
If the equity release plan was a home reversion scheme, the lender may own a share of the property outright. In this case:
- The property typically must be sold after the homeowner's death.
- Sale proceeds are split according to ownership shares. The lender receives their share and the remainder goes to the estate.
- The no negative equity guarantee may still apply if part of the property was mortgaged.
Always check the paperwork to confirm the type of plan.
Does inheritance protection apply?
Some equity release plans include inheritance protection, allowing the original homeowner to ring-fence a percentage of the home’s value for beneficiaries. This ensures some equity remains in the estate even if interest accrues heavily, but it reduces how much the owner could borrow initially.
If included, the protected portion cannot be used to repay the loan and is paid directly to the estate after the sale.
Does equity release affect inheritance tax?
Yes. The equity release loan is deducted from the estate value before calculating inheritance tax. This can reduce or eliminate the tax due, but the trade-off is that less value remains for beneficiaries overall.
Frequently asked questions
Can I take over the existing equity release plan?
No. The loan cannot be transferred to you. You must repay it in full, either by selling or refinancing.
What if the loan is larger than the home’s value?
Most regulated plans include a no negative equity guarantee, which ensures the debt is capped at the sale value. The lender cannot pursue the estate or you for any shortfall.
Can I make partial repayments as a beneficiary?
Sometimes, especially if the plan was taken out after March 2022 and follows Equity Release Council standards. You may be able to reduce the total balance before sale or refinancing, but you’ll still need to repay the full loan within the timeframe.
What happens with home reversion plans?
If the lender owns part of the home, the property must be sold and the proceeds divided according to the agreed shares. You may still be able to buy back the lender’s share, but this must be negotiated at the time.
Summary table
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