If your home is repossessed, any equity you have in the property may be used to repay your mortgage and other debts secured against it. If you're worried about losing your home as a borrower, this guide explains what can happen to your equity during the repossession process and what happens if there is any equity left after your debts are paid.
What is home equity?
Whether you're a homeowner or still house hunting, you've probably heard the word equity thrown around. But what does it actually mean?
Put simply, home equity is the difference between the current market value of the property and the remaining amount left on the mortgage. In other words, your equity is the amount of your home that you own outright.
For example, if your home is worth £250,000 and you still owe £150,000 on your mortgage, your total amount of equity would be £100,000. Significant home equity can be a valuable asset, as it represents actual money that belongs to you.
The deposit you initially make when you first take out a mortgage gives you your first stake of equity in your home. Your share in the property increases with each mortgage payment you make.
If local real estate prices rise, the total value of your home will increase, but the amount you owe towards the mortgage will remain the same.
In some cases, a house sells for less than the remaining balance owed on the mortgage. This is known as a mortgage shortfall, and may mean you receive no equity (also called negative equity).
How much unsecured debt do you have?
How does the home repossession process usually work?
The repossession process usually follows the same set of steps, which we've outlined below. Remember, repossession only occurs after several missed mortgage payments and is usually considered as a last resort, so you will be given multiple opportunities to reach a conclusion before your lender takes ownership of your home.
1. Missed payments
The first step in the home repossession process is missing payments on your mortgage. Lenders will usually contact you to come to an agreement over the missed payments and explore potential solutions that may help.
At this early stage, there are several things you can do to reach a solution and avoid repossession. Remember, the missed payments that led to your property being repossessed will affect your credit rating, which can make it difficult to get approved for another mortgage.
2. Formal notice
If you continue to miss payments and fail to reach an agreement with your mortgage lender, you will receive a formal notice (often called a default notice or notice of default). This is a document that outlines how much debt you owe and what will happen if you fail to take action.
A formal notice will likely mention that you are at risk of repossession.
3. Legal action
If your lender believes they are unlikely to reach an agreement with you, they may initiate court proceedings against you by applying for a possession order.
You'll likely be invited to attend a court hearing, which you must attend, where a judge will decide if you can keep your home. At this stage, it's recommended to seek legal advice and representation.
4. Possession order
If a possession order is granted, you will be informed that you need to vacate the property.
There are two types of possession order: an outright order, which gives you a fixed date to leave, and a suspended order, which lets you stay in the property if you agree to stick to a repayment plan.
5. Eviction date
If you receive an outright order or agree on a suspended order but fail to stick to your payments as agreed, your lender will apply for a warrant of possession, which gives them the right to instruct bailiffs to evict you from the property.
When eviction officers visit you, they will supervise your departure and change the locks to ensure you cannot return. Under UK law, any items you don't take on your eviction date must be stored for a reasonable period (usually 14 days).
6. Property sale
Once you have been evicted, your lender sells the property to recover the outstanding mortgage debt.
The sale of the property usually occurs through an auction or estate agent.
If your house is repossessed by your mortgage lender, do you get an equity?
It's a common misconception that your lender will not only claim the home but also any equity in it during the repossession process, but this is fortunately not the case.
The truth is, the equity you have in your home will remain yours. However, there are certain processes that will take place after your lender takes ownership of your home.
Once your home has been repossessed, the lender's first priority will be to sell the property quickly for the best price under the circumstances. This is often why they favour auctions over traditional estate agents.
If the sale of the property covers your mortgage debt and all additional costs, any money left over (your equity) will be returned to you. Any costs incurred during the sale will also be deducted from the proceeds of the sale.
However, it's important to note that how much equity you ultimately receive will likely differ from the amount you originally estimated. This is because the price your home ends up selling for may be less than the full market value.
If you're on means-tested benefits, your entitlement may be reduced, as any money you receive will be classed as capital.
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Start my enquiryWhat factors can affect equity after repossession?
Several factors can affect the amount of equity you receive after repossession. We've outlined these in more detail below:
Your property value
Your property's market value at the time of the sale can have a substantial impact on the amount of equity you receive. Generally, a higher price equals more equity.
However, because repossessed properties tend to favour a quick sale over a high price, this may reduce the amount you ultimately receive.
Your remaining mortgage balance
The more money you owe on your mortgage, the less equity you will recover.
Any additional arrears, legal fees, and costs incurred during the repossession process can also reduce the amount of equity left in the property after the sale.
Your secured debts
If you have any additional secured debts, such as a second mortgage or secured loan, these debts will be paid from the proceeds of the sale before you receive equity.
How can I avoid repossession?
Whether you're already in mortgage arrears or just worried about the consequences of missing a payment, there are many things you can do to avoid repossession, including:
Talk to your lender immediately
As daunting as it sounds, it's important that you speak to your lender as soon as possible to explain your situation. They may suggest a solution that can help you better afford your payments and avoid repossession.
Even if you need to temporarily adjust your repayment terms for a short period, being proactive is key to avoiding the situation from escalating. Don't wait for them to get in touch with you.
Request a change to your payment terms
You may be able to request a change to your payment terms until you get back on your feet. This could mean extending your repayment term to secure lower monthly payments.
It's important to note that extending your mortgage could increase the amount of interest you pay overall.
Ask about a repayment plan
Many lenders only care about getting the money back, not how they get it back.
If you offer a repayment plan, the lender will likely be happy to come to an agreement with you because it shows a willingness to deal with your debt.
Sell your home yourself
Selling your home yourself before it gets repossessed can mean you get a higher selling price and you retain more equity. However, while the money can be in your bank account quickly, helping you repay your debt, this can end up costing you more, potentially putting you in further financial hardship.
If you choose to go down this route, it's recommended to avoid quick sale companies, as they tend to buy properties for far less than they are worth.
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Conclusion
Finding out your home is going to be repossessed can be scary, but knowing how the process works and how any equity you have will be dealt with can help put your mind at ease.
Generally, when a home is repossessed, money from the sale will go towards repaying the debt and any additional legal fees first. If there is any money left over, it will be transferred to you.
If you have any questions about equity after repossession, don't hesitate to reach out for free advice from an expert advisor. They should be able to review your circumstances and explain the options available to you.
