Could Negative Equity Be a Worry with Equity Release Schemes?

Many people are prudent enough to ask lots of questions before deciding whether or not an equity release scheme would be right for them. Clearly, given the increasing numbers who are using this method to release additional cash in their retirement years, many are receiving the right answers.

One question many people ask (and indeed everyone should ask) when they are looking into equity release is the prospect of negative equity. What happens if this is the situation at the time when the property is sold to pay off the original loan?

The good news is a no negative equity guarantee that is applicable to all equity release products that have been approved by the Equity Release Council (ERC). The ERC has a set of Product Standards that all providers should adhere to. Therefore you must simply make sure the provider you are considering using does indeed conform to these rules. Ask about the provision of this rule to ensure this applies in your case before taking any equity out of your home.

What does the rule mean in reality?

Most properties rise in value over the years. However most of us have known people who have fallen into negative equity at some point. This means the value of the amount they owe on the property is more than the value of the property itself.

The no negative equity guarantee means this can never happen with an equity release scheme. Let’s say your home is worth £150,000 and you live for 20 years after taking out a significant amount of equity in it. If your property were to fall in value there could potentially be a situation in which you might owe more than the property is now worth. While this may not affect you, it would certainly affect your estate and whoever had to deal with it upon your death. This is why the ruling is in place. It gives you the peace of mind of knowing that the cost of paying off the loan will never amount to more than the value of the property once it is sold after you pass on.

No one has any control over the value of their property. While house prices have traditionally risen over time, there have been periods in which they have fallen. Few people who opt for equity release products will find themselves in a situation where the loan exceeds the value of their property. However having this guarantee in place means they do not have to worry even if this does occur in the future.

For the most part there should still be equity left and money left over once the loan has been paid off upon the sale of your property. This cash will then be paid to your estate as would always be the case upon death. As you can see, this is one aspect of an equity release product that is very useful to know.