What is the No Negative Equity Guarantee For Equity Release?
Equity release allows homeowners to benefit from the value of their home by accessing the money that is locked up within it. They do this by taking out an equity release lifetime mortgage, or by having a home reversion.
Both types of equity release provide consumers with tax-free cash that can be spent on anything from the weekly food shop to a second property. They are also similar in the sense that they do not require homeowners to pay back the money they have borrowed, unlike traditional loan schemes.
How Much Money Can I Borrow With an Equity Loan?
The amount you can borrow with an equity loan depends on how valuable your property is and what your age is. Usually, older homeowners can access more money, so your loan would be higher if you were taking out equity in your 70s or 80s than if you were 55 years old (the minimum requirement for equity release).
If your property is extremely valuable, you will without a doubt release more from it than if it meets the minimum value of £70,000.
To find out how much you could release based on your age and property value, use our free equity release calculator. It will tell you what your predicted loan amount is, and you will have the opportunity to provide your details in case you want us to get in touch with you about releasing equity.
What is a No Negative Equity Guarantee For Equity Release?
To explain what a no-negative equity guarantee is, we need to first unpack what negative equity is. When you borrow money from an equity release lender, you are borrowing based on the value of your home. However, this value is likely to change over time as the property market changes.
This means that your home may deteriorate in value after you have taken out equity. This would leave the lender with less money from your home sale, and as a result, you would technically owe more money.
Another reason you may end up owing more than you borrowed is that compound interest is applied to equity-release loans. This means that the interest is added on every year, and because you tend to be on the scheme for life, it can rack up significantly.
However, a no-negative equity guarantee ensures that you will never have to pay back more than you borrowed when you first pursued equity release. Some lenders provide this guarantee as a way to ensure their clients that the client’s family will not get into debt through equity release upon the client’s death.
What do Homeowners Know About Negative Equity?
Many people worry that by releasing equity, they would get into irreversible debt as the interest would accumulate to an amount that they could not afford to repay.
Studies have shown that 23% of homeowners believe they would lose their home if they took out equity, as they do not understand that there is a no negative equity guarantee provided by many equity release lenders (1).
This is perhaps less surprising when we consider that there are many myths about equity release in general, not just relating to no negative equity guarantees. For instance, the aforementioned study found that 67% of homeowners freely admit they are not aware of how interest can affect equity release plans.
Have a look at our article on the myths of equity release if you are looking to clear up some common stereotypes. Equity release is most likely much safer, more profitable, and more flexible than you have been told.
What Happens If I Don’t Have a No Negative Equity Guarantee?
If you do not have a no negative equity guarantee, you are at risk of owing back more money than you borrowed from the equity release lender. This may happen if your interest adds up a significant amount, or if your property loses value over time.
In this situation, your family would lose out as the equity release lender would take more of your funds for themselves when you passed away.
However, our advice is to always ensure your equity release plan includes a no negative equity guarantee, as this ensures more of your funds can be passed on to your loved ones upon your death.
Will I Ever Have to Repay the Loan While I am Still Alive?
No, you will never have to repay your equity loan while you are still alive. This is why equity release is a great scheme for anyone who is struggling financially, as they are entitled to a loan that they do not have to make repayments on.
Some people even choose to use equity release as a way of paying off their existing mortgage. This is because they would ordinarily need to make monthly payments on their conventional mortgage, but when they release equity, they do not have to find the funds to pay back the money each month, or ever.
Even if you do not have a no negative equity guarantee, you will never be expected to pay back the debt while you are alive, as there is never an obligation to make repayments. Instead, what happens is that the scheme will come to an end when you pass away or enter long-term care.
At this point, the equity release provider will sell your home and the debt will be paid through the sale.
If the sales proceeds do not cover the cost of your loan, as we mentioned above, your family would have to find a way to pay off the debts, unless you had a no negative equity guarantee. They may choose to use some of the other funds from your estate if any are available, or they may have to dip into their own savings.
What are the Pros of a No Negative Equity Guarantee?
Firstly, if you have a no negative equity guarantee, you do not have to worry about holding back on spending your loan. If you want to purchase a second home with your loan, you would be free to do this, and you would not have to worry about entering later life poverty.
Secondly, with a no negative equity guarantee, your family is able to inherit more of your funds. This is great news for anyone who wants to release equity to fund their retirement, but does not want to take away all of their family’s inheritance.
Finally, if your equity release lender provides a no negative equity guarantee, it is much more likely that they are a trusted equity release provider, rather than a firm that is trying to scam you.
What are the Cons of a No Negative Equity Guarantee?
We would argue that there are no downsides to having a no negative equity guarantee. This is because it provides you with protection and ensures you are not paying back more money than you borrowed, which keeps the equity release scheme safe and fair.
The property market is always changing, so you cannot predict whether your property will appreciate or depreciate in value over the course of the equity release scheme. This is especially true if you take out equity at a young age.
For instance, if you released equity as a 55-year-old and you passed away at 85, you would have been an equity release consumer for 30 years, and your property could change significantly in value over that time.
For this reason, we would argue there is no harm in getting a no-negative equity guarantee, as the worst-case scenario is that your home appreciates in value and you end up not needing to fall back on the guarantee.
However, the worst-case scenario with not having a guarantee is that you would end up owing a large amount of money, and getting your family into debt that they may not be able to resolve.
That being said, not every single equity release lender offers a no negative equity guarantee, so you may have to narrow down your search which possibly means spending more money.
All equity release lenders that are members of the Equity Release Council (ERC) have to offer a no-negative equity guarantee, as this is one of the standards held by the ERC (2).
This will make your search easier, as you simply have to find a provider that is an ERC member.
How to Ensure You Don’t Owe Back More than You Borrowed
Aside from ensuring your equity release lender is an ERC member, there are other things you can do to ensure you will not have to pay back more than you borrowed.
The first thing to do is speak to a professional equity release adviser who can help you to find a plan and a lender with a no negative equity guarantee. As most equity release lenders offer no negative equity guarantees nowadays, it shouldn’t be too difficult for your lender to help you with this.
Another idea is for you to enrol onto a repayment plan, which would allow you to repay some of the loan or interest to ensure you do not end up owing a large amount. You could take out a voluntary payment lifetime mortgage and make repayments as and when you can while you are on the scheme.
Alternatively, you could opt for an interest-only plan in order to keep your interest and compound interest as low as possible. This would be a great way to avoid negative equity as the interest wouldn’t accumulate if you regularly repaid it.
Seek Equity Release Advice Today
Please contact us today if you want to get involved with equity release whilst ensuring you do not owe more money than you borrow. We would be happy to explain the concept of negative equity in more detail, as well as helping you to access a plan that offers a no negative equity guarantee.
If you do not want this guarantee, it is your choice, but please be aware that this could end up backfiring if your property value decreases or if you do not make repayments on your loan. Ask an equity release adviser about this, and they will help you to consider which option is right for you.
Before you take out equity, it is vital that you consider how it will impact your future, including how your family will be affected by it.
One of the ways you can do this is to secure a no negative equity guarantee, but you can also seek inheritance protection, downsizing protection, and ensure you do adequate research into which lender and plan are right for you.
We know there are many horror stories about equity release, but if you approach the most sensible way possible, taking our advice into account, you will be in safe hands. You can do this by reading our articles, contacting us for advice, and doing independent research into equity release.
The reason we believe you should contact us instead of another equity release company is that we are prepared to be honest about the scheme, so we will not shy away from the negatives of equity release.
Other companies may try to pressure you into taking out equity, but we acknowledge that the scheme isn’t right for everyone, so you will never be obligated to make an application to an equity release lender.
That being said, we are just as happy to show you how to apply for equity release if you are looking to secure an equity loan as soon as possible. You would be able to get your loan in around 6-8 weeks if you applied today, but we only recommend doing this if you know enough about equity release and have spoken to a professional equity release adviser.
Equity Release Warehouse offers a free consultation for all of our new customers, so why not take advantage of this by calling us on 0330 058 1579 or requesting a call from one of our equity release specialists?
References
[1] Poor understanding of negative equity guarantee: Age Partnership https://www.equityreleasecouncil.com/news/tackling-the-great-injustice-facing-elderly-homeowners/
[2] Standards https://www.equityreleasecouncil.com/about/standards/
