If you own a property, there may come a time when you would like to make a change to who owns it. This is known as a ‘transfer of equity.’
It often happens after a separation or divorce, but there are plenty of other reasons too.
In this post, we’ll explain what a transfer of equity is, how it works and what your mortgage lender will need before they can approve it.
What does a transfer of equity mean?
A transfer of equity means changing who legally owns a property. If there’s a mortgage, it also means changing who is responsible for paying it.
Because of this, there are usually two parts to the process which need to be completed simultaneously. The legal ownership needs updating with HM Land Registry, and the mortgage needs to be changed.
Your lender won’t simply add or remove someone. They’ll first need to check the mortgage remains affordable.
This is to ensure that if someone is being removed the mortgage is still affordable for the remaining person. If someone is being added, the lender will need to check that the combined income can cover all expenditure and the mortgage payments.
Reasons for transfer of equity
Separation isn’t the only reason someone might want to remove a person from a mortgage.
Other common examples include:
Removing an owner:
- Friends who bought together to get onto the property ladder but, following pay rises, are now ready to buy on their own.
- A family member who helped someone buy their first home but no longer needs to stay on the mortgage
Adding an owner
- Adding a new partner to the property ownership.
- Adding a family member to support with the mortgage following a change of circumstances.
Every situation is different, so your lender will look at your circumstances before deciding whether they can approve the change.
Buying a partner out of a mortgage
Most people buy a home together, expecting to own it for many years. Sometimes life doesn’t go to plan, and relationships come to an end.
This is one of the most common reasons people transfer equity, and why some people call it ‘buying their partner out’.
In many cases, one person wants to remain in the property while the other moves out. This is particularly common when children are involved, as it minimises disruption and means they can often stay living near their friends and school.
If there’s a mortgage, the lender must also agree to remove one borrower from the mortgage. Until the lender has approved the change, everyone named on the mortgage remains responsible for making the repayments.
How is a transfer of equity calculated
If you are removing someone from the property, and you’ve both been paying the mortgage, you’ve probably both built up equity in the home. The person leaving will usually expect to receive the value of their share.
The first step is agreeing on what the property is worth. This is normally done using an independent valuation. You then subtract what’s left on the mortgage. The amount remaining is your equity.
For example, if your home is worth £300,000 and you still owe £180,000 on your mortgage, you have £120,000 of equity.
If the property is owned as joint tenants, you will need to agree on what your share of the equity will be.
If the property is owned as tenants in common your share will have been pre-agreed between you.
The remaining owner might be able to pay any funds due from their savings. If not, they may need to borrow more from their mortgage lender to buy out the other person’s share.
When a lender carries out new affordability checks, they need to be confident that the remaining borrower can afford both the existing mortgage and any additional borrowing needed.
The application to remove someone from a mortgage needs to be undertaken by the person who is remaining on the mortgage. In some cases, there may be fees to pay.
Each lender may also have its own additional criteria, such as the mortgage may need to have been in place for a certain length of time, with no arrears, or have a maximum loan-to-value.
Removing a guarantor from a mortgage
Some older-style mortgages relied on a guarantor. A guarantor agreed to cover the mortgage payments if the borrower couldn’t. This gave the lender extra confidence, especially for first-time buyers.
Today, Joint Borrower Sole Proprietor (JBSP) mortgages are more common. With a JBSP mortgage, another person or persons join the mortgage to help with affordability, but they don’t become a legal owner of the property.
A guarantor or joint borrower may only be needed for a few years. As a borrower’s income grows, they may be able to meet their lenders affordability criteria on their own. If the lender agrees, they can be removed from the mortgage at a later date.
One of the benefits of a JBSP mortgage is that the joint or additional borrowers aren’t legal owners of the property. This means that, should they be removed from the mortgage, on this particular type of mortgage, there is no need to update the ownership records with HM Land Registry.
Can you do a transfer of equity yourself?
If you have a mortgage, you won’t be able to complete a transfer of equity yourself.
Your lender must approve the change before anyone can be added to or removed from the mortgage. They’ll check that the mortgage remains affordable. This normally means providing evidence of income, spending and other financial commitments.
You’ll also usually need a solicitor or conveyancer, so there will be legal fees to pay. They’ll prepare the legal documents and update the property’s legal ownership with HM Land Registry.
While it’s possible to make some Land Registry applications yourself, a transfer of equity involving a mortgage requires professional help.
Could you pay stamp duty on a transfer of equity?
A transfer of equity doesn’t always mean you’ll have to pay Stamp Duty Land Tax (SDLT), but it is possible depending on your circumstances.
In many cases, no SDLT is due when a property is transferred between spouses or civil partners, or when the transfer is made because of a court order following a divorce or legal separation. In other situations, or where someone is being added, SDLT may be payable. Your solicitor or conveyancer will be able to advise you.
When should you speak to your mortgage lender?
Speak to your lender as soon as you think you may need a transfer of equity. Don’t assume it will automatically be granted.
If the lender is comfortable with the situation, you may be able to keep your existing mortgage product.
If you need to remortgage or take a new product, check whether your current mortgage has an Early Repayment Charge (ERC). This is a fee some lenders charge if you leave your existing mortgage deal before it ends.
Sometimes a transfer of equity isn’t possible straight away. If the remaining borrower doesn’t meet the lender’s affordability checks, both borrowers may need to stay on the mortgage, even if one person has moved out.
Your lender isn’t trying to make the process difficult. They simply need to be sure the mortgage will remain affordable after the changes are made.
Summary
Transferring equity is often possible, but speaking to your lender early on can help you understand the options, avoid delays and plan your next steps. They can explain what’s needed, whether you can keep your existing mortgage and, if not, what your alternatives are.
