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Can you lose your house with Equity Release?
One of the most common and frequently asked questions when people are consider Equity Release is… Can I lose my house with Equity Release?
No, you wont lose your house with Equity Release as long as you take a plan that is approved by the Equity Release Council and abide by all the terms and conditions of the Equity Release agreement.
There have been significant protections brought in to ensure that people don’t fall into negative equity and although you won’t lose your house with Equity Release there are situations where it may arise. Let’s take a closer look at what Equity Release means for you and your property.
Can I lose my house if I fall into negative equity?
As long as you’ve taken an Equity Release agreement approved by the Equity Release Council (ERC) you will have a “no-negative equity” guarantee. This means that even if your house does fall into negative equity that you wont lose your house will not owe more than the value of your property.
How does a house fall into negative equity?
For a house to have negative equity, you simply need to owe more than the value of the property.
The example below illustrates how the amount you owe to the equity release provider increases over time depending on the interest rate. This example assumes that the property does not grow in value.
| House value with NO growth | House Value | Typical mortgage amount @ 8% | Equity to pass on |
|---|---|---|---|
| 1 | £300,000 | £70,000.00 | £230,000 |
| 2 | £300,000 | £75,600.00 | £224,400 |
| 3 | £300,000 | £81,648.0 | £218,352 |
| 4 | £300,000 | £88,179.84 | £211,820 |
| 5 | £300,000 | £95,234.23 | £204,765 |
| 6 | £300,000 | £102,852.97 | £197,147.03 |
| 7 | £300,000 | £111,081.20 | £188,918.80 |
| 8 | £300,000 | £119,967.70 | £180,032.30 |
| 9 | £300,000 | £129,565.11 | £170,434.8 |
| 10 | £300,000 | £139,930.32 | £160,069.68 |
| 11 | £300,000 | £151,124.75 | £148,875.25 |
| 12 | £300,000 | £163,214.73 | £136,785.27 |
| 13 | £300,000 | £176,271.91 | £123,728.00 |
| 14 | £300,000 | £190,373.66 | £109,626.34 |
| 15 | £300,000 | £205,603.55 | £94,396.45 |
| 16 | £300,000 | £222,051.84 | £77,948.16 |
| 17 | £300,000 | £239,815.9 | £60,184.0 |
| 18 | £300,000 | £259,001.26 | £40,998.74 |
| 19 | £300,000 | £279,721.36 | £20,278.60 |
| 20 | £300,000 | £302,099.07 | 0 |
| 21 | £300,000 | £326,267.00 | 0 |
| 22 | £300,000 | £352,368.36 | 0 |
| 23 | £300,000 | £380,557.83 | 0 |
| 24 | £300,000 | £411,002.46 | 0 |
| 25 | £300,000 | £443,882.65 | 0 |
As you can see by year 20 you would owe more than the value of the property so in effect be in negative equity.
The example below assumes consistent house growth of 3% every year and illustrates how much equity you would have left to pass on as inheritance.
| House value with 3% growth | House Value | Typical mortgage amount @ 8% | eEquity to pass on |
|---|---|---|---|
| 1 | £300,000 | £70,000.00 | £230,000 |
| 2 | £309,000 | £75,600.00 | £233,400 |
| 3 | £318,270 | £81,648.0 | £236,622 |
| 4 | £327,818 | £88,179.84 | £239,638 |
| 5 | £337,653 | £95,234.23 | £242,418 |
| 6 | £347,782 | £102,852.97 | £244,929 |
| 7 | £358,216 | £111,081.20 | £247,134 |
| 8 | £368,962 | £119,967.70 | £248,994 |
| 9 | £380,031 | £129,565.11 | £250,466 |
| 10 | £391,432 | £139,930.32 | £251,502 |
| 11 | £403,175 | £151,124.75 | £252,050 |
| 12 | £415,270 | £163,214.73 | £252,055 |
| 13 | £427,728 | £176,271.91 | £251,456 |
| 14 | £440,560 | £190,373.66 | £250,186 |
| 15 | £453,777 | £205,603.55 | £248,173 |
| 16 | £467,390 | £222,051.84 | £245,338 |
| 17 | £481,412 | £239,815.9 | £241,596 |
| 18 | £495,854 | £259,001.26 | £236,853 |
| 19 | £510,730 | £279,721.36 | £231,009 |
| 20 | £526,052 | £302,099.07 | £223,953 |
| 21 | £541,833 | £326,267.00 | £215,566 |
| 22 | £558,088 | £352,368.36 | £205,72 |
| 23 | £574,831 | £380,557.83 | £194,273 |
| 24 | £592,076 | £411,002.46 | £181,073 |
| 25 | £609,838 | £443,882.65 | £165,956 |
Can my house be repossessed if I use Equity Release?
If you fall behind on your payments or get into a situation where you owe more money on your home than it is worth, the Equity Release provider will not repossess your home. This is because you do not have to start making payments until you sell the property.
However, like any other legal contract, in order for the Equity Release provider to release equity and loan the money, the borrowing homeowner will need to agree to specific terms and conditions. If the legal agreement is broken (a breach of contract), then there are some scenarios where your home could be repossessed and you could lose your home:
- False information on your application can lead to the lender taking back your home. This usually happens if you lied about your age, income, address or provided false documents.
- You do not maintain the house – If you do not maintain the home and it loses a lot of value, this might be cause for repossession since the lender would need to recoup their investment.
- The Equity Release lender will give the borrower 12 months to repay the loan. If this does not happen, then the estate, any other savings, or the property can be sold or rented out. If none of these solutions work, then the property could be repossessed.
- If you have not been living in your house for more than 6 months, and you have not been taken care of, the Equity Release provider may look to repossess your home.
Equity Release plan lenders almost never take back a property from the borrower. Before any legal action is taken, the lender must give notice to the borrower about what they are doing wrong and what they need to do to fix the problem.
How do repayments and negative equity affect an Equity Release mortgage?
An Equity Release mortgage does not require any regular payments (although some products do now offer this). As a result homeowners do not have to worry about losing their property and having it repossessed by an Equity Release firm due to affordability.
There are two main types of Equity Release plans – the lifetime mortgage plan and the home reversion plan.
With a lifetime mortgage, you will own a lifetime lease on the property. This means that you can stay in your home until you move into long term care or die. You will not lose your home if it goes into negative equity.
How do repayments and negative equity affect a traditional mortgage?
With a traditional mortgage, a lender agrees to give you money to help you buy a property. You will have to pay back the money, with rolled-up interest, over time. If you have an interest only mortgage, you will only have to pay back the interest each month. If you have a repayment mortgage, you will also have to pay back the capital.
If you stop making regular payments on a traditional mortgage, the lender might take you to court and repossess your home. This could happen if the interest rate rises and the repayment becomes too expensive for you. The lender will then sell your home at auction in order to repay the loan.
If the sale value of your home at auction is not enough to pay off your loan, you will have to pay the remaining amount of the loan. You will lose your home and any equity you may have built up in it. People often ask us if they can get Equity Release at the same time as having a mortgage.
How can we help?
Equity Release can be an attractive prospect. If you do find yourself in a situation where you’re unsure of what you should be doing we’re here to help and support you.
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