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When I Sell My House, What Happens To The Equity?

Property Saviour » Equity Release » When I Sell My House, What Happens To The Equity?

As you pay off your mortgage, you will build equity in your property. But what does this mean, and what will happen to that equity when you sell your house?

The team at Property Saviour – a fast cash home-buying company – is here to explain how equity works when you are looking to sell your property.

We’ll answer what equity is, how to calculate it, what happens when you release equity, and what to do if you fall into a negative equity situation.

Table of Contents

What is Equity in a Home?

Property specialists often mention “equity”. But what does it mean? How does it relate to the sale of your home?

Put simply, equity is the portion of a property’s market value that you own outright. It doesn’t include money still owed on a mortgage.  Just the amount you’ve paid off in terms of a deposit and loan.

The larger the portion of your house’s total value that you own – i.e. the higher the percentage of its value that you’ve paid – the more equity you possess in the property.

Any home improvements will add to your equity. If you have extended your house or fully modernised it, it adds value to your home. It means you own an additional equity “stake”.

The sale of the property will need to cover the remaining mortgage, any estate agent and solicitor fees, as well as any other expenses. The breakdown of this is as follows:

  • Property Selling Price: £200,000
  • Remaining Mortgage: -£90,000
  • Estate agent and solicitor fees: -£10,000
  • All other expenses: -£2,500
  • Equity = £97,500.

How to Calculate Equity in a Home?

It’s easy to calculate how much equity you have in your home. All you need to do is find an accurate estimate of your property’s current market value and subtract the amount you still owe on your mortgage.

The figure left is the amount you have already paid – your home equity. If you’re unsure how to go about this, contact your mortgage provider for help.

When I Sell My House, What Happens To The Equity
Any home improvements will add to your equity. If you have extended your house or fully modernised it, it adds value to your home. It means you own an additional equity "stake".

What Happens to the Equity in my House When I Sell?

So, what happens to equity when you sell your house?

  1. When selling your property to a buyer, the payment they make usually covers any expenses you incur during the sales process and pays off any outstanding mortgage amounts.
  2. The remainder of the payment goes to you; the exact amount you receive will depend on how much equity you have in the home. 

Can I Sell My House if I Have Equity Release?

If you have taken an equity release loan against your property, it is best to check the redemption figure.  These loans come with punitive administrative charges, exit fees and high-interest rates.

When you sell, the sale proceeds will clear your equity release loan, and the surplus funds will be sent to you.

You could consider downsizing and, by doing so, pay off your equity release loan and own your new home outright.

Or, if you are living in your forever home, you can look into paying off the equity release loan using a retirement mortgage.

Many sellers choose to borrow against the equity in their home to cover expenses such as starting a business, making improvements, paying for care, or any other large lump sum costs. Equity release can be a great option as the amount is tax-free.  But you can also sell your primary residence and take the surplus equity as tax-free.  

Equity release loan comes with compounded interest. This can quickly turn into an equity-release horror story

How Selling a Home With Equity Release Works?

Selling a home with equity release is a process that follows a familiar pattern, but it needs to be planned out carefully.

Generally, the equity release provider must receive repayment when you choose to sell. This repayment amount is usually taken from the sale proceeds and includes the initial loan amount and any accrued interest.

As long as your equity release plan has a No Negative Equity Guarantee, the repayment will not be more than the sale value of your home, even if the debt has increased. After the loan is repaid, any remaining sale proceeds are yours to keep.

Could I Take My Equity Release Loan With Me
If the value of your new property is lower than your current one, the lender may ask you to repay a portion of the loan to reduce their risk.

Could I Take My Equity Release Loan With Me?

You can take your equity release loan with you when you move home, depending on your loan agreement and whether your provider finds your new property suitable. This process is often referred to as ‘porting’.

Things to bear in mind:

  • Your new home must meet the lender’s criteria and be suitable as security for the loan.
  • Criteria may include the location, condition and type of the property.
  • If the value of your new property is lower than your current one, the lender may ask you to repay a portion of the loan to reduce their risk.
  • This is usually done from the proceeds of the sale of your old home.

It is important to seek professional advice when considering porting an equity release loan to ensure you fully understand the implications and associated costs.

What Are the Advantages of Selling a House With Equity Release?

The advantages of selling a house with equity release include downsizing and moving closer to family.

Some of the benefits of using equity release when selling your house include:

  1. Moving to a more affordable property, which gives you extra funds to use during retirement.
  2. Relocating to a home that suits your changing needs as you age.
  3. Moving to the retirement destination of your choice, be it nearer to family or a more picturesque area.

However, it’s important to bear in mind that selling a house involves paying for moving costs, solicitors’ fees, and stamp duty, and moving can be a very stressful process.

What Are the Risks of Selling a House With Equity Release?

The risks of selling a house with equity release can be substantial. If house prices have dropped, the amount you receive for paying off your lifetime mortgage could be less than the existing equity.

You may also have to pay existing fees associated with the equity release plan before receiving any proceeds from the sale.

Repaying the equity release loan from the sale proceeds can reduce the amount available for the homeowner or their estate, especially if the property value hasn’t increased significantly.

There may be early repayment charges if you pay off the loan before the end of the term.

You should consider the risks before making a decision, as they may outweigh the benefits depending on your circumstances. It is recommended to speak to a qualified financial advisor before making any decisions.

Guide for Selling a House With Equity Release
Inform your equity release provider of your intention to sell. They will provide a settlement figure, indicating the total amount to be repaid.

A Step-by-Step Guide for Selling a House With Equity Release

A step-by-step guide for selling a house with equity release can make the process smoother and help you to avoid any potential issues:

Here’s what to do:

Consult with a financial advisor to explore your options and understand the implications.

Inform your equity release provider of your intention to sell. They will provide a settlement figure, indicating the total amount to be repaid.

Use an estate agent to sell your home. Once your home is sold, the solicitor will usually handle the repayment of the equity release loan from the sale proceeds. Any remaining funds after the repayment will be yours.

By following these steps, you can sell your property with an existing equity release plan and ensure that the loan is repaid correctly.

What Are the Costs Involved in Selling a House With Equity Release?

The costs involved in selling a house with equity release include the repayment of the original loan amount plus any accrued interest.

Other costs are early repayment charges:

  • If you’re still within the early repayment period of your equity release plan, these charges can be significant and may be a percentage of the outstanding loan balance or a fixed fee.
  • Redemption fees, a percentage of the outstanding loan and fees that cover the administrative costs of closing the plan.
  • Estate agent fees, which may include valuation fees. These fees are typically calculated as a percentage of the sale price of the property and are usually charged between 0.9% and 2%, with an average of 1.5% in 2023.
  • Solicitor’s fees, which usually depend on their hourly rate and the complexity of the transaction.
  • Stamp duty on your new property.

Speak to a financial advisor to discuss the costs you’ll have to consider.

How to Sell a House with Negative Equity?

It’s possible to get into a state of “negative equity”, especially during a time of financial crisis. Negative equity is when the value of a property falls below the value of the mortgage taken out on it.

If you’re in this situation, you have a few options:

  1. You can wait for the market to improve before you sell,
  2. You can renovate the property to make it worth more than the mortgage.
  3. You could also make payments on the mortgage until it’s worth less than the property.

We hope this article has given you a better understanding of equity when it comes to selling your home.

Can Property Saviour Help?

Regardless of the equity you have in your house, Property Saviour can help you sell it quickly. Even if you are in negative equity, we can make you a no-obligation cash offer.

If you want to find out more about how Property Saviour can help you sell your house quickly, get in touch with us today.

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