Can I lose my house with equity release?
Can I lose my house with equity release?
As with many topics in the financial services arena, there can be a fair amount of misinformation and strong opinions floating around and equity release is no different. A question our equity release advisers often hear is "Can I lose my house with equity release?" and the short answer is no, you can't lose your house with an equity release plan providing you abide by the terms of the contract. The long answer however, is a little more complicated.
How does equity release work?
Equity release is a way for an older homeowner (aged 55 and over) to borrow money against the value of their home, without having to make monthly repayments until such time as they no longer need the property (either because they have gone into long-term care or pass away). The money raised from releasing equity often goes towards home improvements, healthcare or to provide an additional income and to proceed with an equity release scheme, there needs to be no existing mortgage on the property (otherwise some of the funds raised via equity release will go towards clearing that mortgage).
The most popular types of equity release scheme are a lifetime mortgage and a home reversion plan.
What is negative equity?
The concern for losing your home via equity release stems from getting into a position whereby the sum of money borrowed, plus the interest that's rolled-up into the total loan, becomes greater than the value of the property the money was borrowed against when it is sold - this situation is known as negative equity.
If (loan value + interest) > value of the property = negative equity
How do repayments and negative equity affect a traditional mortgage?
With a traditional mortgage, a mortgage lender agrees to lend a sum of money to a borrower for the purpose of buying a property, on the basis that regular repayments are made to cover interest on the loan (in the case of an interest only mortgage) or the interest and the capital (in the case of a repayment mortgage).
The risk of losing your home with a traditional mortgage is when a borrower stops making these regular payments and, if they fall too far behind, the lender decides to take the borrower to court and repossess the property. This could be because of a rise in the interest rate of a mortgage and the repayment becomes unaffordable. The lender will then sell the property at auction in an effort to repay the loan.
However, if the sale value achieved at auction is not sufficient to clear the outstanding loan balance, the borrower will not only have lost their home and all equity they may or may not have accumulated in it, but they will also be required to repay the remaining the balance of the loan.
How do repayments and negative equity affect an equity release mortgage?
In the case of an equity release mortgage, there are no regular repayments to make (although some products do now offer this but that is the exception). Therefore the concern that some homeowners may have around losing their home and having it repossessed by an equity release provider, due to unaffordability on the owner’s part, are unfounded.
Equally, any concern around falling into negative equity and the equity release provider then recalling the loan and asking for repayment in full is also unfounded. Clearly, this would be alarming if the outstanding loan was greater than the value of the house and you may initially think you could lose your home. However, with both a lifetime mortgage and a home reversion plan (the main two types of equity release plan), you will own a lifetime lease on the property, which gives you the right to stay in your home until you move into long term care or pass away. This means that you will not lose your home if you fall into negative equity.
What is a 'No Negative Equity Guarantee'?
Furthermore, if you choose an equity release product from a responsible equity release provider that is a member of the Equity Release Council, you will benefit from a No Negative Equity Guarantee when it comes time to sell.
A No Negative Equity Guarantee means that you never have to pay back any more than the property was sold for, providing you get the 'best price reasonably achievable'. This typically means that the property is advertised on the open market, using an estate agent, for a sufficient period that allows all interested parties to bid.
Essentially, the risk of falling into negative equity falls on the shoulders of the lender and not the homeowner, which is why the percentage of the value of the property they will lend increases as the borrower's age increases.
Can my house be repossessed if I use Equity Release?
As we've discussed above, getting into a position of negative equity is not cause for an equity release provider to repossess your property. Neither is falling behind on repayments as there are no repayments to make until you no longer need the property and the property is sold.
However, as with all legal contracts, for the equity release provider to release equity and lend the money, the borrowing homeowner will need to agree to a specific set of terms and conditions. If the legal agreement is broken (a breach of contract) the equity release provider may have grounds to take the borrower to court and repossess the property.
These terms and conditions may include:
An agreement to maintain the property in good order.
An agreement to not rent out or sublet the property.
Nonetheless, it is incredibly rare for equity release plan lenders to repossess properties and they are required to give notice to the borrower about what they are doing wrong and what they need to do to fix the problem, before any legal action is taken.
How does regulation help those looking to release equity?
Whilst it is true that in the past, before equity release advice was regulated, some borrowers lost their homes to repossession by falling foul of an unfair equity release loan, today equity release schemes (whether it's a lifetime mortgage or a home reversion plan) are now some of the most highly regulated financial products in the UK and The Equity Release Council spearheads the fight for the best possible consumer outcomes. As a result, it's important that any homeowner considering releasing equity protects their best interests by making sure their responsible equity release adviser is regulated by the Financial Conduct Authority and is also a member of the Equity Release Council.
What’s next?
You can read our in-depth article, What is Equity Release and how does Equity Release work for a more detailed look at Equity Release or head over to our equity release calculator to get a quick estimate on the amount of money you could release from your property with a home equity loan without having to input any personal details.
How AV Trinity can help with your Equity Release questions?
If you need responsible equity release advice you can speak to a Chartered Financial Adviser here in Tunbridge Wells, wherever you are in the UK. Our financial advisers are Equity Release experts and on hand to help you find an equity release plan that suits your needs, whether that's a lifetime mortgage or home reversion plan. We are members of the Equity Release Council and signatories of the Financial Vulnerability Taskforce.
Your financial adviser can also offer broader financial advice on a range of topics from mortgages, remortgages, pensions and investments to inheritance tax and estate planning. We offer a free, no-obligation initial consultation at our office, over the phone or by video chat regardless of where you are in the country. Locally, we serve clients across Kent including Ashford, Maidstone, Sevenoaks and Tonbridge. In East Sussex, we have clients in Bexhill, Crowborough, Eastbourne, Hastings, Heathfield and Uckfield.
This article offers information about financial planning and should not be taken as personal advice. Equity Release will reduce the value of your estate and may affect your entitlement to state benefits. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.