Equity is the value of the property after repayment of any outstanding loan. A transfer of equity means a change in legal ownership of a property. It will often take place where a borrower is added to or released from a mortgage. For example, a transfer of equity can occur as a result of a breakdown between spouses or partners where the joint names need to be transferred to the sole name of the person who will remain at the property- this is known as a 2:1 transfer. Likewise, one legal owner transferring to two is known as a 1:2 transfer.
The formalities of transferring equity vary depending on the type of transfer taking place. Most would involve a document known as a Transfer Deed being signed and witnessed by both parties to the transaction.
If the property is also subject to a mortgage then the person transferring ownership will have to be released. The Mortgage Lender is a party to the transfer of equity and must therefore give its consent to this before releasing the former owner from the mortgage. The Lender may consider the credit status of applicants, previous track record of payments and will attempt to identify any potential problems in relation to future payments. The lender may refuse to give its consent if the person to whom the property is being transferred cannot demonstrate that he can afford contractual payments. Instead, the other former joint owner may remain liable on the mortgage after the transfer.
Alternatively, you can arrange a new mortgage with a different lender combined with the transfer of equity- a transfer and remortgage. Remortgaging could be the better solution because it can allow for a more preferential rate and would raise additional capital. However, more formalities are required for this.
Once the amount to be paid under the transfer is agreed between the parties and approval has been received from the existing lender or from a new mortgage provider and the Transfer Deed has been signed and witnessed then the transaction is complete.
A few further steps need to be taken after this:
Stamp Duty Land Tax (SDLT) may have to be paid. A form will need to be completed and submitted to the Revenue & Customs (HMRC) with any Stamp Duty payable on the transfer if it involved any consideration. HMRC will return a SDLT Certificate.
The change in ownership must then be registered at the Land Registry. This can take several weeks. A registration fee is payable. The Transfer Deed, SDLT Certificate and the mortgage deed (if applicable) will need to be submitted with the application to the Land Registry.
Once ownership has been transferred, the new owner should take out buildings and contents insurance and should run from the date of completion to protect against the risk of fire and other damage occurring to the property.
If you are considering a change in ownership of your property, it is recommended you seek legal advice. Please contact us for further information, specific to your individual circumstances.