If your house is repossessed, do you keep your equity?
Another question that comes up often is “if my house is repossessed, do I keep my equity?”
When your house is repossessed due to mortgage arrears, the lender will typically sell the property to recover the outstanding loan balance. However, if the sale of the house fetches more than the outstanding debt, you may receive what is known as equity from the sale.
Here’s how it works:
1. Sale of the House
Once your house is repossessed, the lender will sell it, often at auction or through an estate agent. They aim to recover the money owed on the mortgage, but the sale price can sometimes be lower than market value, depending on market conditions and how quickly they want to sell.
2. Outstanding Debt
From the sale proceeds, the lender will deduct:
- a) The outstanding mortgage balance.
- b) Any interest or penalties accumulated.
- c) Legal and repossession costs, which can include court fees and auction fees.
3. Surplus or Shortfall
Surplus: If the sale price is higher than the total amount owed (including fees and penalties), the remaining amount after settling the debt is your equity. The lender must return this surplus to you.
Shortfall: If the sale price doesn’t cover the full amount of the debt, there will be a shortfall. In this case, you would still owe the remaining balance to the lender. The lender could pursue this through further legal action.
Key Considerations:
The timing of the sale and the method used (e.g., auction) can affect the price, and often repossessed homes are sold for less than their market value.
Any second charges (like other loans secured on the house) or joint ownership agreements will also affect how much equity you might get.
Conclusion:
Yes, if your house is repossessed and it sells for more than the outstanding mortgage debt and associated costs, you will receive the equity from the sale. However, if the sale price is insufficient to cover the debt, you may still owe the remaining balance.
It’s always a good idea to seek advice before repossession happens to explore all available options, like negotiating with the lender or selling the property yourself to maximise your equity.