Can a testator leave their share of residence on life interest trust for survivor where there is an equity release (lifetime) mortgage on the property?

Is it possible for testators to leave their share of their residence on life interest trust for the survivor when there is an equity release mortgage on the property? I understand that under the terms of the mortgage, it will not be repayable until such time as either both owners have died or the last surviving has gone into long term care.

Can their Wills leave their respective shares in the property on life interest trusts subject to the mortgage outstanding at the date of death? I am concerned that it will be complicated to deal with on death and more importantly that this sort of scenario is not possible due to the type of mortgage.

Sara Anthony
John Hodge

There have been a number of postings on the forum concerning the sort of arrangement referred to.

If the mortgage is only repayable on the death of the survivor (or their entry into long-term care), unless there is a specific prohibition within the mortgage agreement the parties are able to deal with their property rights as they see fit, which will include the creation of a life interest in their beneficial entitlement.

However, this can give rise to administrative complications, especially if the interest in the property is separated from the rest of the estate.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Presumably, given how long equity release has been around someone will have come across this issue in practice. My thoughts are as follows.

In principle, property subject to mortgage can become trust property albeit subject to the mortgagee’s consent. Hence the consent of the mortgagee under the equity release plan will almost certainly be required.

The mortgagee needs to be able to sell the property without issue under its charge once the surviving spouse dies or moves into a care home. Presumably the property is held in joint spouse names and would, on the death of the first spouse to die, be held solely in the name of the surviving spouse. I’m not sure that settling the beneficial interest of the deceased spouse interferes with the charge of the mortgagee who should not therefore in principle object.

It should be noted that where the equity release plan takes the form of a lifetime mortgage sometimes the mortgagee will not accept a property owned as beneficial tenants in common.

Any outstanding mortgage (plus interest, often rolled-up) on death of the surviving spouse cannot exceed the market value of the property assuming a “no negative equity” guarantee is included in the plan (such guarantees are always part of plans offered by members of the Equity Release Council). No issues therefore arise as to who and in what proportions any shortfall is to be satisfied.

However, once the property is sold and the mortgage debt repaid how would any surplus be allocated between the estate of the last surviving spouse and the trustees of the interest settled by first spouse on death to be allocated? For example, interest will be paid or continue to be rolled up post the death of the first spouse; will this cost be shared equally, or in line with the percentage of each tenant in common?

Malcolm Finney