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Scottish Trust Deeds for Homeowners

Assets and Trust Deeds

Working Out the Equity in Your House or Flat

 

The equity is your home's value minus any secured mortgages. If your home is worth £100,000 and your mortgage is £90,000, your equity is £10,000.

 

You can contact your mortgage lender to confirm your mortgage balance. They’ll provide you with a mortgage redemption statement.

 

Your home may be similar to others locally. Recent local sales may guide you to a valuation. Valuations estimates are available from websites like Zoopla.

 

If your home is jointly-owned, you’ll normally be seen to own 50% of the equity. £10,000 of equity in a jointly-owned property could be a £5,000 asset for you.

Low Levels of Equity

Your home may have little equity. This situation shouldn’t be complex.

 

Some trust deed providers use an equity threshold of £5,000. Equity of £5,000 (or less) may effectively get ignored. The selling costs for such a property would wipe out any profit.

 

The same applies with negative equity. Selling your property would create a new debt to the mortgage lender. This wouldn’t usually help anybody.

 

Negative Equity

You're in negative equity if your mortgage balance is higher than the value.

 

If you have negative equity, no asset vests in your trustee. Selling your home wouldn't recover money for your creditors.

 

This should get confirmed in writing prior to signing. This continues to apply if equity arises before discharge. The negative equity position gets fixed at the start.

 

It won't remain fixed if your trust deed fails. This could happen if you don’t make the payments. It could happen if you fail to cooperate with your trustee. If equity has developed, your home could be put at risk.

 

What if Your Property Increases in Value?

 

Equity in your property is “fixed” at the start of your trust deed. The trustee instructs a valuation. You provide a mortgage redemption statement.

 

Before you sign the trust deed, you know whether equity is present.

 

If the value of your property increases, it will make no difference. Your equity position remains fixed. However, this doesn't apply if your trust deed fails.

 

How Is Your Equity Treated?

 

Any equity in your home gets discussed before the trust deed begins. A plan to deal with it gets recorded in writing.

 

You may need to make additional payments to deal with equity. This is separate from your normal monthly payments.

 

One option is to extend the term of a trust deed. They run for a minimum of four years. Your trustee could suggest an extra year of payments for example. This is a common solution.

 

You may have a relative or friend who can help. They could pay over a lump sum to address the equity. This could avoid an extension.

 

You might choose to sell the property. This is an option if staying there isn’t your personal priority.

 

It’s unlikely that you will get a mortgage to release equity.

 

Property Abandonment Fee

 

Some trust deed firms charge a “property abandonment fee”. This fee is charged if there is no (or very little) equity in your home.

 

The fee was previously charged to avoid the home being valued again later. The fee will vary. Some firms charge £500 or £550. This money has to be found in addition to your other payments.

 

It’s unclear to us why any firm continues to charge this. It’s unclear why anyone would choose to pay it. Other trust deed firms will provide the exact same outcome without this fee.

 

I’m Told That My Equity Can Get Ignored?

 

You may get told that your full equity doesn't have to get paid over.

 

With creditor disclosure, it’s agreed that part of the equity gets paid. Payment may come from an extension of your payments.

 

A trustee has formed a view that this option is best for the creditors. For example, if the debtor became bankrupt the creditors would receive less. This is because both bankruptcy and forced house sale costs are high.

 

This may seem attractive to you. The alternatives could be long-term plans. DAS and debt management run until debts have been repaid in full.

 

This approach towards equity does come with one big risk…

 

A Significant Risk for Homeowners with Equity

 

Equity agreements get made right at the start. This is reassuring if you’re worried about losing your home due to debts.

 

These agreements are however conditional. You’re expected to complete your obligations under the trust deed. These obligations last until your discharge.

 

Your equity agreement could become null and void. This could happen if you fail to make your payments. It could happen if you don't cooperate with your trustee. If this happens, your trustee might consider the sale of your home.

 

A sale of a home can get forced by a trustee. Your protected trust deed could get failed by the trustee. They could petition for your bankruptcy. This would (of course) be a last resort.

 

You should be aware of this risk at the start. If you’re dealing with a firm that hasn’t mentioned this to you, it’s not a good sign.

 

What’s your risk of failing to complete a trust deed? Is your job secure? Are you in good health? If you’re self-employed, what’s the financial outlook for your business? Would you and your family be OK if you had to move house?

 

If the risks feel too high, consider other debt solutions. DAS may help to protect your home. Your unsecured creditors cannot take legal action against you. Equity isn’t taken into account by DAS.

 

Repossession Issues

 

Repossessions of homes are running at a low level. However, many homeowners do have mortgage arrears. This increases repossession risks.

 

Repossession Before Your Trust Deed

 

If your home got repossessed, you may have a mortgage shortfall debt. A shortfall on your mortgage is an unsecured type of debt.

 

The lender might not press for immediate repayment. However, they’ll look for payment in the future. This could occur many years in the future. Collection might be outsourced to a debt collection agency. The debt might be sold to another company.

 

Mortgage shortfall debts get included in trust deeds. If you complete the arrangement, any unpaid mortgage shortfall amount gets written off.

 

Repossession During Your Trust Deed

 

You may be subject to repossession action when signing your trust deed. You may expect a mortgage shortfall debt, but don’t yet know how much it will be. You don’t need to know the amount owed prior to going ahead.

 

This is a “contingent debt”. You expect a new debt, but you don’t know how much it will be yet. Contingent debts get included in trust deeds. The lender will need to submit a claim to your trustee. They’ll receive a dividend, like your other creditors do.

 

This applies even if you did not know that this debt would arise. Provided that the mortgage existed when your trust deed began, it gets included. The new shortfall will become an included creditor.  The balance owed gets written-off if you complete your trust deed.

 

Remember to pay your mortgage payments during your protected trust deed. If you don't, the mortgage lender may seek to repossess your home.

 

Repossession After Your Trust Deed

 

Your home might get repossessed after discharge from your trust deed.

 

Did the mortgage exist when your trust deed began? If so, any future shortfall debt likely got included. This usually applies even if your trustee is no longer involved in your case.

 

It might be too late for the mortgage lender to make a claim on your trust deed. This isn't your problem. You shouldn't usually be liable for the new shortfall debt.

 

The mortgage lender may take some time to recognize this status. You may have to make a case to them explaining this.

 

Selling Your Home During Your Trust Deed

 

What happens if you want to sell your house or flat prior to discharge?

 

You can sell your home if your trustee consents. Solicitors involved in a house sale will contact your trustee. They will have found the “inhibition” that your trustee has put in place. If the trustee doesn’t consent to the sale, the sale won't happen.

 

An equity agreement for your property will cease to apply. The trustee will require all of the profit from the sale. This will be used to help repay your creditors. Trust deed equity agreements don't apply if your home gets sold.

 

Without any sale profits, you will have no deposit for a new purchase. Mortgage lenders don’t tend to lend to people in trust deeds. You may therefore have to move to rented property.

 

If you are moving for work reasons, consider renting your home out instead. You are allowed to rent out your home while in a Scottish trust deed.

 

Who Can Help a Homeowner to Start A Trust Deed?

 

Different trustees deal with equity in different ways. If you’re speaking to a firm, you might want a second opinion. You may get offered a better solution, like a shorter trust deed.

 

Our advice team can assist you with this. Please get in touch for help. Different trust deed providers may offer you different options.

 

 

Page last updated: 25/02/2019

 

 

(c) Channel Active Limited. Company Number: 06412452. Data Protection Registration: Z1332750.

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Trust-Deed.co.uk, Clyde Offices, 2nd Floor, 48 West George Street, Glasgow, G2 1BP. Tel: 0141 2490416.

 

(c) Channel Active Limited. Company Number: 06412452. Data Protection Registration: Z1332750.

Telephone calls may be monitored or recorded. Authorised and regulated by the Financial Conduct Authority.

Trust-Deed.co.uk, Clyde Offices, 2nd Floor, 48 West George Street, Glasgow, G2 1BP. Tel: 0141 2490416.