All lenders require borrower to mortgage the house to them for the duration of the loan. This means that the legal title to the house is assigned to the lender, but the borrower retains the right to live there. When the loan has been fully repaid, the lender has to reassign the house to the borrower. This right to reassignment on repayment is know as the borrower's 'equity of redemption'.

The word 'equity' is also used to describe the difference between the value of the house and the amount of the loan. For example if a £150,000 house is bought with a 90% mortgage, the borrower's equity of 10 % will be worth £15,000. A borrower is said to have 'negative equity' if the loan is more than the value of the property. This usually arises where a property's value has dropped immediately after purchase.

Default

If the borrower defaults on payments, the lender is entitled to sell the house to recover the loan. There may be problems in removing the borrower to gain vacant possession and this is usually the option of last resort for a lender. If a lender does sell teh house, they are only entitled to keep the amount owed and must pass on the balance of the sale price after expenses to the borrower.

Guarantors

In some instances where the lender is concerned about the borrower's ability to meet their commitments, the lender will advance monies provided a guaranto stands behind the borrower. The guarantor will then be responsible for payments if the borrower defaults. A typical example would be a parent acting asa guarantor for a student buying a flat.

Protection

Another way that lenders can protect their interests in your property is by requiring you to take out certain financial protection products, either through them or some other provider. This could be mortgage payment protection insurance, which provides money to continue meeting your payments for a period of time should you be unable to work as a result of accident, sickness or redundancy. Alternatively, it could be mortgage protection life insurance, which provides a lump sum payout designed to clear your mortgage debt if the main earner dies.