Any good equity release contracts will give you the guarantee the at the point that the loan is redeemed if your property is in negative equity you or your family will not pick up the excess bill.
To explain this further, it is perhaps a good idea to first understand exactly what equity is.
Let's look at a simple example :
John and Mary have owned their home for the last 10 years. They have a mortgage on their property and if they had to repay that mortgage today, then they would need to give the mortgage company £100,000. They have also had their house valued and the valuation has come back at £300,000 pound. This means that they have equity of £200,000. Equity therefore, is the difference between the value of a property less any loans or charges that may be in place against the property.
This is a fairly common situation and something that is easily understood. So now let's look at something a little more complicated.
Christine and Tony purchased their property 10 years ago. The property purchase price was £250,000. They had a deposit of £50,000 and took out an interest only mortgage of £200,000. Unfortunately for them some structural problems with the property have caused it to lose value. If they were to sell it today, they have been told that they would only receive £180,000. If they did sell the property, they would be obliged to repay the mortgage. As the mortgage is interest only, the debt has not reduced and they would still need to repay the mortgage company £200,000. As the mortgage debt is more than the actual value of the property, Christine and Tony are said to be in negative equity. In this particular example they have negative equity of £20,000 (£180,000 less £200,000).
Finally, we can now look at what a no negative equity guarantee looks like with regards to equity release.
Sam and Charlie took out an equity release loan 15 years ago. At that time their house was valued at 250,000 pounds and they were therefore able to take an equity release loan of 100,000 pounds. Sam passed away five years ago which means that the equity release loan will need to be repaid either when Charlie dies, or he gets taken into long term care. Sam and Charlie also had some bad luck with regards to their house value which has fallen to just 200,000 pounds. On checking his last equity release statement Charlie sees the debt is now standing at 210,000 pounds. This means that Charlie has negative equity to the value of £10,000. Charlie is worried because he does not have the extra £10,000 to repay the debt. Equally he doesn't want to pass this debt onto other members of his family. He therefore calls his equity release adviser to discuss the situation. After reading the equity release contract the advisor explains that a no negative equity guarantee applied the maximum that Charlie would have to repay on death is the value of the property. In very simple terms if Charlie were to die today even though the equity release debt is £210,000, because the property is worth £200,000 that is the maximum that the equity release provider can claim. They cannot ask Charlie or his family to repay the £10,000 pounds that is in negative equity. They equally cannot force Charlie to sell the home and he is free to live in it for the rest of his life, even if the negative equity grows.
Although negative equity is very rare, and it is equally hoped the property gross would increase to match the increase in the equity release debt, it is comforting to know that should the worst happen that financial penalty will not be passed on to those you leave behind.
If you want to understand better the guarantees that you can expect from an equity release contract, then call us now on 020 33 55 4837 and speak to one of our fully qualified equity release advisors