Can You Lose Your House with Equity Release?

Are you interested in equity release but worried about what could happen to your house? You've come to the right place.

We know that it can be a worry to think about money and debt. You may feel unsure about how equity release works and what could happen if things don’t go as planned.Studies found that over half of equity release customers use equity release to fund home improvement projects.¹

That’s why, in this article, we’ll explain:

•  What equity release is, and how it works
•  The risks that come with equity release
•  How negative equity could impact you
•  Ways to get a realistic quote for equity release
•  If you could lose your home because of equity release

This guide explains key risks and questions to discuss with a qualified adviser before deciding whether equity release is suitable for you.

Ready to learn more about equity release and what it could mean for you and your home? Let’s get started.

What Is Equity Release?

Equity release is a way for you to gain access to some of the value of your home. There are two schemes that are considered to be forms of equity release, and these are:

• Home reversion: You sell either part of your home (the value) or all of your home to the finance company. You then live in your home until you either die or move to full-time residential care facilities.
• Lifetime mortgage: you borrow a fixed sum of money, and the loan is secured against the value of your property. How long this equity release scheme works depends on whether it ends with you moving to a different property, into residential care, or if you die.

So the main takeaways here are that you can:

• You may remain while meeting the plan’s occupancy and other contract conditions.
• If you move home, you can generally move the equity release plan as well.
• A qualifying no-negative-equity guarantee limits repayment to net sale proceeds when its conditions are met; it does not stop the balance exceeding the home’s value.

You can find out more about the different types of equity release schemes in my handy guide.

Independent legal advice is separate from financial advice. Your own eligible legal professional checks the legal terms and acts for you; the financial adviser assesses product suitability.

How Does Negative Equity Happen?

The concept of negative equity is pretty simple to explain. Imagine you purchased your home for £500,000 initially.

Negative equity means the outstanding debts secured on a property exceed its current value. For example,£450,000 of secured debt against a £400,000 home gives £50,000 negative equity. It is not measured by how much mortgage capital has already been repaid.

How Does Negative Equity Impact Equity Release?

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Can You Lose Your Home Because of Equity Release?

Now you know what negative equity is, I need to explain how it can have an impact on your equity release plan. I have already mentioned using a finance firm that offers an ERC-approved equity release scheme. It may pay to avoid equity-release companies that are not ERC-approved. There have been a number of equity release horror stories from people using unapproved vendors.

A fall in property value alone does not usually trigger repayment of a standard lifetime mortgage. However, contractual defaults can put the home at risk.

Repayment triggers and any required interest payments depend on the plan. The final borrower’s death or permanent move into care are usual end events, but other breaches may also trigger action.

1. You gave false information when you applied for an equity release type of loan.
2. You failed to keep the house maintained properly, to the standard that the loan agreement stated.
3. A permanent move into care by the final borrower normally triggers repayment. The deadline and any extension must be confirmed with the lender; it is not universally 12 months.
4. The property must remain your main residence and meet the contract’s occupancy conditions; do not assume a universal six-month absence allowance.

How can equity release affect inheritance?

Taking out an equity release plan may lower the amount of your inheritance, and many people are concerned that there may not be a lot left to leave to your beneficiaries.

Some products offer inheritance protection for an agreed share, subject to conditions and a reduced advance. It does not guarantee the family’s overall inheritance against all future events.

What Happens When You Start Making Repayments but Have Negative Equity?

Where payments are required or chosen, the amount follows the loan agreement, rate and payment arrangement.

A lower property valuation does not automatically reduce the loan balance or required interest payments. Ask the lender about support if payments become unaffordable.

A no-negative-equity guarantee does not automatically recalculate monthly instalments to match current property value. It concerns repayment from sale proceeds when its conditions apply.

The Bottom Line

Follow the contract’s payment, occupancy, insurance and maintenance terms and seek advice early if circumstances change. Council safeguards do not remove every risk of repossession. See related guidance.

References

1. Legal & General – Equity release helps customers stay in their forever homes