Negative Equity And Scottish Trust Deeds
Updated: 20th September 2016
If your home is worth less than the mortgage(s) attached to it, then it is considered to be in negative equity. The value of the home is typically established via a property valuation from a surveyor firm. A redemption statement from the mortgage or secured loan lender will confirm the current mortgage balance.
When this article was originally written (in 2014) 8% of homes in the UK were in negative equity, but the figure was much higher in Scotland (at around 13%). The percentages may have fallen somewhat since that time, but sadly for many people negative equity continues to be an issue.
What happens to a home that’s in negative equity if you proceed with a trust deed in Scotland? In normal circumstances, when you sign a trust deed your equity “vests” in your trustee (because it is deemed to be an asset). You’d need to come to an agreement with your trustee as to how that equity would be dealt with as part of your protected trust deed.
Where there is no equity, or your home is in negative equity, the situation is different. In such circumstances there effectively is no asset. The sale of the home would normally bring no benefit whatsoever to your creditors. Therefore no extra financial obligation towards the trust deed is created.
As part of the process of setting up a Scottish trust deed your trustee will arrange to carry out a valuation of your home. Ideally you’ll already have confirmed your mortgage balance with the lender. Once the valuation is received you’ll be able to assess whether the equity in your home will vest in your trustee (and have to be tackled somehow) or whether a lack of equity (or negative equity) effectively means that your property is left out of this debt arrangement altogether.
What happens if equity develops in your home later on during the trust deed process? Thankfully, after some relatively recent rule changes, this is no longer an issue. The amount of equity in your home is fixed at the start of a trust deed.
This valuation “fix” might cease to be effective if your trust deed fails. Failure of a trust deed might result from you becoming unable to make your agreed payment, or from ceasing to comply with reasonable requests from your trustee. If your mortgage balance has gone down and/or your property value has increased, you could be left exposed in such a scenario.
Being a homeowner with negative equity is likely to make setting up a protected trust deed more straightforward and less risky than it is for other homeowners. Caution should still be exercised however to enter into an arrangement you’re entirely sure is sustainable, with a provider that you trust, and with a sincere determination to complete the process over a minimum of four years.
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