One of the most significant concerns that people have with equity release schemes is that compounding interest on the loan can increase the debt to a point where the sale value of the house is not sufficient to repay the debt. A situation wherein the debt is larger than the value of the home, so that you are required to repay the loan from your own funds or estate is known as negative equity.
Compounding interest on roll up lifetime mortgages often caused the debt to grow disproportionately large over time, so much so that not only did a client lose their estate to the loan provider, but were still left with an outstanding debt. In response to this crisis, the FSA tightened its regulations on the equity release sector. Today, all equity release schemes approved by the Equity Release Council come with a no negative equity guarantee to protect the consumer. The Equity Release Council has a code of conduct for equity release providers, and this contains regulations that the plans must follow in order to be certified or approved by the Equity Release Council.
In case of home reversion plans, there is no question of interest as the equity released is in exchange of selling a portion of the house and not a loan. Since there is no interest to be paid on the lump sum you receive, the debt cannot actually grow larger. However, there is still the possibility of negative equity in home reversion plans – in the unlikely event that the property depreciates so that its value when the plan ends is lower than when it started.
In such a case, the value of the house would not be adequate to cover the value of the home reversion plan, and repay the home reversion provider. Without a no negative equity guarantee in place, your beneficiaries would have to pay the provider the remaining balance.
Providing the plan is approved by the Equity Release Council, the difference between the original amount and the sale value of the property is written off. This means that your beneficiaries do not have to pay anything back to the home reversion provider. This is a significant step in making equity release schemes more secure and reducing the amount of risk associated with them.
Therefore, when it comes to home reversion plans that are approved by the Equity Release Council, irrespective of whether your house appreciates or depreciates, your beneficiaries will never have to pay the home reversion provider under any circumstances.Tags:Compunding Interest, Equity Release Council, Equity Release Providers, Equity Release Schemes, Equity Release Sector, FSA, Home Reversion, Home Reversion Plans, Home Reversion Scheme, Loan Provider, Negative Equity, No Negative Equity Guarantee, No Negative Equity Release, Roll Up Lifetime Mortgages