No Negative Equity Guarantee: Equity Release Protection

If you're thinking about releasing equity from your home through a lifetime mortgage, it's important to know about the no negative equity guarantee. This guarantee can give you peace of mind by ensuring that you won't owe more than your home's value, even if the value decreases over time. With a no negative equity guarantee, you won't leave any debts to your family because of your equity release borrowing. Make sure you fully understand this benefit before making a decision about equity release.

In this insight, we'll tell you about the no negative equity guarantee for lifetime mortgages. You'll learn what it is, why it's important, and how to include it in your plan.

Key Takeaways

• A no negative equity guarantee ensures that you won't owe more than your home's value, even if the value drops over time.
• The no negative equity guarantee is a standard feature for most lifetime mortgages in the UK.
• Knowing that you won't leave any debts to your family because of your equity release borrowing can provide peace of mind.
• The Equity Release Council requires all its members to offer a no negative equity guarantee on their lifetime mortgages.

What is a no negative equity guarantee?

A no negative equity guarantee is a feature of a lifetime mortgage that ensures you won't owe more than the value of your home. If the value of your home falls below the amount borrowed, this guarantee ensures that your debt will be capped at the value of your home.

It forms part of the terms agreed upfront with a lifetime mortgage. It is designed to prevent the borrower from leaving debt for their family. If the value of the home falls below the amount owed, the guarantee kicks in and caps the debt at the home's value. When the borrower passes away, the lifetime mortgage is cleared with the home sale proceeds, and the family is not required to take on the debt. 

The guarantee provides peace of mind that equity release won't penalise the borrower's family.

How does it work?

If negative equity occurs, the debt outstanding above the property value is wiped off. The amount of redemption won't exceed the property's value. Even if the property value continues to drop, the outstanding amount due will fall in line.

For example. Let's say you take out a lifetime mortgage for £200,000 and the value of your property is £300,000 at the time. Over the years, the interest on the loan accumulates and the outstanding balance grows to £250,000. However, due to a decline in property prices, the value of your home drops to £225,000.

Under a no negative equity guarantee, the outstanding balance of your loan would be capped at the value of your property, which in this case is £225,000. So, the £25,000 difference between the outstanding balance of your loan (£250,000) and the value of your property (£225,000) would be written off.

This ensures that even if property values drop, you or your family will never owe more than the value of your property, and the outstanding balance of your loan will fall in line with any decrease in the property value.

Which Equity Release products have no negative equity guarantees available?

No negative equity guarantees are only offered with lifetime mortgages because interest can accumulate and potentially exceed the home's value. In contrast, with a home reversion plan, a percentage of the home is sold for an agreed amount, which is usually less than the home's true value. However, since the sale is arranged as a percentage, it can never surpass the home's value. Even if the entire home is sold, the debt will not exceed the home's value.

Adding a no negative equity guarantee to your lifetime mortgage

When you are in the market for a lifetime mortgage, consider looking only for providers who offer this protection. Currently, most lenders include it as a standard feature. It is also a requirement for members of the equity release council to offer a no negative equity guarantee as part of their lifetime mortgages

The council is a trade body that represents equity release providers in the UK. It sets standards to protect consumers. If you take out a lifetime mortgage from an Equity Release Council member, you can be confident that it will have a no negative equity guarantee.

If you are unsure whether the lender you are using offers a no negative guarantee, you can ask for it to be included alongside written terms of how it will work.

Why is a no negative equity guarantee important?

It's a critical protection for anyone taking out a lifetime mortgage. If negative equity occurs without a no negative equity guarantee, you or your estate will be responsible for paying off the remaining debt. That could cause significant financial problems for you or your loved ones. Having a no negative equity guarantee provides peace of mind and a level of financial security for borrowers and their families.

Age Partnership recently surveyed 1001 homeowners aged 55 and over, asking them a straightforward question: "In the context of equity release, are you aware of what the no negative equity guarantee means?" Unfortunately, the answer wasn't as straightforward. A staggering 71% of respondents replied with a "No," indicating that they were not familiar with what the no negative equity guarantee means.

This is a worrying outcome as a no negative equity guarantee is an essential safeguard for anyone considering equity release. It guarantees that the amount owed by the borrower, including any interest, will never exceed the value of the property. This means that the borrower or their estate won't be responsible for any shortfall if the property's value doesn't cover the outstanding loan balance when it's sold.

If you're considering equity release, remember that a no negative equity guarantee is a crucial protection that can provide peace of mind and financial security for you and your loved ones.

Getting the right advice on Equity Release and no negative equity guarantees

If you're unsure where to start with equity release advice, complete the Sunny Fact Find for Mortgage advice. The fact find helps us to find you the best-suited adviser. Your adviser then contacts you to discuss how they can help. You decide how to proceed. The advisers onboarded to Sunny Avenue are all members of the Equity Release Council, who ensure No Negative Equity Guarantees are included in their members products.

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