The moment you enter into a lifetime mortgage plan, the amount of inheritance you can leave behind for your beneficiaries will be reduced. A mortgage provider gives you money based on the agreement that once you die or permanently move out of your home, it will be sold to repay your debt. Based on the amount that you owe the supplier, the sales proceeds from your home may only be sufficient to pay the provider leaving nothing left over for your beneficiaries.
So if you are concerned that your lifetime mortgage plan will prevent you from leaving an inheritance for your loved ones, you should look for a provider who offers an inheritance guarantee. Equity release providers who offer inheritance guarantee are guaranteeing you that when your home is sold, a portion of the sales proceeds will go to your beneficiaries.
The Specifics of the Guarantee
The inheritance guarantee is however subjected to two terms. First of all, it needs to be sold immediately when you die or permanently move out of it. Secondly, it needs to be sold for the best price obtainable for it.
It is important that the inheritance guarantee is agreed upon before the other arrangements for the plan is made. You need to agree on the percentage beforehand. This is the percentage that you want to guarantee so that when the property is sold the agreed percentage will go toward your beneficiaries.
You do however need to understand that if you opt for an inheritance guarantee, the amount that you will be allowed to borrow will be decreased. You will only be able to borrow against the value of the home that is not a part of the inheritance guarantee. So if your inheritance guarantee is thirty percent of the property value, you will only be allowed to borrow against the remaining seventy percentage of the property value. And even then, you will not be allowed to borrow the amount that is equivalent to the entire seventy percent.
Equity Release Products for Retirees
It needs to be noted that whether you have the guarantee or not 100% of the home value is never provided in lifetime equity release products. It is due to the interest and home value issues. Home values never remain the same. In one, five, ten, or twenty years your home value may increase and decrease. At the time of the sale this is when the value truly matters.
If the value is under what is owed on the home this puts the mortgage company in a difficult situation. They have just lost money. It is something the equity release provider is not willing to bet on. It is also the reason that at most you have 70% of the home available in a lifetime equity release and more often the value given to you is under 50%. It means that the home has at least 30 to 50 per cent of untapped equity to ensure the interest rate accrual is not going to create a negative equity situation.
Negative Equity Clause
As you put in an inheritance guarantee, you also want to make certain there is a no negative equity clause. Without this clause the lender could decide that the entire home value is theirs because the home value decreased beyond expectations or the interest grew larger than the original calculation. To get an accurate calculation we recommend using this equity release calculator.
The no negative equity clause keeps the mortgage lender from trying to get more than just the housing value from you or your beneficiaries. Should the house be undervalued then any sale payment goes to the lender less the inheritance guarantee amount.
As your family is going to be affected by the lifetime equity release product you are currently considering they should be involved in the decision. It is always helpful to have more than one opinion on what is best for you and your family. Your beneficiaries may have alternative ideas with regards to your home, retirement, and quality of life. It is important for many to leave behind an inheritance, but do not get buried in the details and forget that your happiness in life is important too.
Remember that you need to choose the inheritance guarantee from the beginning. You cannot add it later on. You can however remove it or reduce the percentage if you need more money. But you will not be able to add it nor will you be able to increase the percentage of the inheritance amount from the lifetime mortgage.
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