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Bad Credit Equity Release – Complete Review 2022#

equity release bad credit

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What is bad credit equity release – and is it possible to release equity with a bad credit history? 

If you’ve been considering a lifetime mortgage or any other equity release scheme but are worried that bad credit will hold you back, you need to hear this first. 

What is equity release?

Equity release is a way for homeowners in later life to access some of the equity in their home without being asked to make monthly repayments on the cash they received. 

The money and any applied interest are instead repaid when your home is eventually sold from the sale proceeds. You continue living in the property as normal and will not be forced to sell unless you move into long-term care. Otherwise, the debt is repaid after death from the sale of the property in your estate. 

It is strongly recommended to only consider an equity release plan from a lender that is a member of the Equity Release Council. In doing so, you receive additional guarantees and assurances and you can be sure that the company is authorised and regulated by the Financial Conduct Authority. 

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Who can get an equity release scheme?

Equity release schemes are only available to senior homeowners who meet a minimum age requirement set by the lender somewhere between 55 and 65. They must be releasing equity from their main residence as opposed to a holiday home and the property must be of a minimum value usually around £75,000. 

How does equity release work?

There are two main ways of releasing equity as a senior in the UK:

#1: Lifetime mortgage

A lifetime mortgage lets you release a percentage of equity below 60% and applies a fixed interest rate. The interest does not need to be paid back but rolls up and adds to the total debt. Although some people choose to voluntarily pay the interest to keep their total debt down. 

Over the course of a decade, the amount of money you released could double, but no lender that is a member of the Equity Release Council can charge you more than what your property is sold for in the end. So if the debt grows bigger than the property value, no additional money is owed. 

#2: Home reversion scheme

Home reversion schemes do not charge interest, They allow you to access some of your equity in exchange for a greater percentage of your property’s sale value when it is eventually sold. For example, you could receive £30,000 (20%) from your £150,000, but when it is sold ten years later for £180,000, you may have to pay back £90,000 (50%) to the lender. 

Do you get credit checked for equity release?

Yes, even though you are not asked to make monthly repayments, the lender will still check your credit file as part of the equity release process.

Can equity release be refused?

Yes, it is possible to have your equity release application refused. Read on to uncover some of the common reasons why. 

Common reasons for equity release to be refused

The most common reasons for having a lifetime mortgage or home reversion scheme denied is because:

  1. The property is below the minimum value required
  2. The property would be difficult to sell in the future due to its uniqueness
  3. The property does not conform to building rules and regulations
  4. The property is in bad shape
  5. The property is at risk from natural disasters, such as flooding

Can you release equity with bad credit?

You can use an equity release plan if you have bad or adverse credit from previous debts. 

Equity release schemes do not require monthly payments or any regular repayments from the homeowner. For that reason, your credit history and credit score is not rigorously assessed as part of a lifetime mortgage or home reversion plan application. 

But it will still be looked at to identify any existing arrears and CCJs. 

Can I get equity release if I have a CCJ?

A County Court Judgment (CCJ) is an instruction from the courts to pay back an existing debt owed to a company. A CCJ will appear on your credit file and reduce your credit rating. 

If the court’s instruction is not followed, the company can then ask for further action to be taken, such as using bailiffs or even asking for a Charging Order to be placed on your property. A Charging Order means that when the property is sold, some of the sale proceeds must be sent to the company that is owed the debt. It could even enforce the sale. 

For this reason, most lenders will not provide equity release plans to people with a CCJ. They may want you to clear your arrears before applying for an equity release plan. 

Can you get equity release if you have debts?

You can usually still release equity if you have existing debts, as long as those debts are not attached to your home or home equity. 

When you take out a lifetime mortgage or any other plan, the lender must be the only debt attached to your property. So, if you have an existing mortgage or home equity loan, you’ll not be able to take out an equity release plan until those debts have been paid off. 

On some rare occasions, the equity release provider may allow you to take out a lump sum of equity with the provision that you use some of it to pay off a small existing first charge mortgage. 

You can sometimes still take out equity release plans if you have existing debt and arrears not secured by your property, such as a credit card or personal loan. However, the lender may ensure that some of the money is used to clear your arrears. In these cases, you may not get your hands on the money first and it will be sent to your creditors to clear the debt first. 

Many senior homeowners use equity release to pay off debts as well as make retirement more enjoyable. 

Don’t confuse equity release with borrowing against equity!

It’s important not to confuse equity release with borrowing against your home equity in your younger years, such as using a home equity loan. These loans require immediate repayment through a fixed period of monthly repayments. If you do not keep up repayments your home may be repossessed and sold to pay off your debt and any other mortgage. 

Getting one of these loans will include a much more robust credit check. If you have poor credit it could stop you from getting a home equity loan or result in being offered a much higher and unattractive interest rate. Even if you have a poor credit rating, don’t be tempted by illegal or rogue lenders offering better deals. Only consider these loans from companies that are authorised and regulated by the Financial Conduct Authority. 

Can I get a home equity loan with a 500 credit score?

Yes, it would be possible to get a home equity loan with a 500 credit score, but you’re not likely to be offered an attractive interest rate. The lender judges each application on more than the credit score alone by looking at your finances, existing debts and the overall affordability of the loan you want to take out. 

More bad credit equity release information!

For more information on taking out equity with bad credit at any age, stay tuned to MoneyNerd. We have lots more discussions on this topic in our guides and blogs. 

Why not start by reading about home equity loans specifically for people with bad credit