What is a ’no negative equity’ guarantee in equity release?
Scott Robertson
10th May 2024
Many modern equity release products come with a ‘no negative equity’ guarantee. This is a protection that makes sure you’ll never owe more on your loan than the value of your home.
In this article, we explore how a ‘no negative equity’ guarantee works with a few examples.
What does ‘negative equity’ mean?
Your ‘equity’ in your home is its value minus any loans against it. ‘Negative equity’ means you owe more than the value of your home.
So, if you have a home worth £300,000, and an outstanding mortgage of £50,000, then you have £250,000 of ‘equity’.
When you release equity from your home with a lifetime mortgage, you don’t always need to make repayments. But compound interest will grow on your loan over time.
If you aren’t making repayments and you live a long life, or your home drops in value, your total amount owed could reach (or even exceed) the value of your home.
For example, if you had a home worth £300,000 with an outstanding mortgage of £350,000, then you would have negative equity of -£50,000 in your home.
A ‘no negative equity’ guarantee on your lifetime mortgage means you’ll never owe more than your home is worth. Even if your loan plus interest is more than your home’s value when it’s sold, any outstanding amount owed will be written off. So you won’t leave your loved ones with equity release-related debt.
Why is a ‘no negative equity guarantee’ needed?
When you release equity with a lifetime mortgage, the loan is repaid from the sale of your home when you die or move into long-term care.
There is a risk that the property might sell for less than the amount owed. This depends on market conditions, how long you live, and whether you have made repayments.
A ‘no negative equity’ guarantee protects your loved ones from needing to pay the outstanding balance from the rest of your estate. So your personal property, savings, or stocks and shares could still be inherited, and no equity release debt will be passed on.
How does a ‘no negative equity’ guarantee work?
Here are a few examples of how a ‘no negative equity’ guarantee would work in different scenarios:
Example A
Jen and Paul have a property valued at £300,000. They decide to release 20% of their available equity – £60,000. Interest is added to their amount owed each month and they aren’t making any repayments, so the interest compounds.
After 20 years, Paul passes away, and Jen moves into permanent residential care. At this point, the total amount owed is just under £200,000.
Their home is sold, but a market crash has caused it to plummet in value. It only sells for £150,000.
Thanks to their ‘no negative equity’ guarantee, the loan provider writes off the remaining £50,000 debt. This means Jen can use her remaining assets to fund her care.
Example B
Cath’s home is valued at £400,000. She decides to release 50% of the equity in her home – £200,000. She does not make any repayments, so compound interest builds every month.
Cath is in great health and lives a very long life. After 25 years she dies, leaving her estate to her children.
At this point, the amount owed on her equity release loan is almost £900,000. House prices have also risen in this time, but her home only sells for £800,000.
As she has a ‘no negative equity’ guarantee, her provider writes off the remaining £100,000 owed. Cath’s children inherit the rest of her assets without worrying about any equity release debt.
Example C
Tim’s home is valued at £500,000. He decides to release 15% – £75,000. He chooses to make monthly payments covering the interest added, so his amount owed never grows.
When he passes away, his home has increased in value to £650,000. His amount owed is still £75,000. So £575,000 can be inherited as part of his estate once the loan has been repaid.
Because Tim made payments to cover interest added, he didn’t need to make use of his ‘no negative equity’ guarantee.
How do I know whether I have a no negative equity guarantee?
In the 80s and 90s, unregulated equity release schemes left many customer estates in debt. Nowadays, there’s a lot more industry regulation. Equity release offerings now include more features and protections like the ‘no negative equity’ guarantee.
The Equity Release Council is an industry body which promotes consumer-friendly equity release. Providers who are members of the council must provide a ‘no negative equity’ guarantee on their products.
Even providers who are not members of the council often follow their best practice example. Most will also offer a no negative equity guarantee, but it’s best to double check with your advisor.
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