Equity of redemption is a term used to describe a legal right of a borrower who owns or is buying a property with a mortgage. This right allows the borrower to settle the debt associated with the mortgage and save the property from foreclosure–thus preserving their “equity” in the property.
The History of Equity of Redemption
In common law, the legal theory of equity of redemption originated in the mid-17th century. It stated that the borrower should be able to retain their ownership rights in the property if they take proactive steps—such as refinancing or paying off the loan—to avoid foreclosure. Since then, the concept has evolved, though it still generally works to protect the borrower’s property rights.
Equity of Redemption in Action
For example, if a borrower has fallen behind on their mortgage payments, they may be able to invoke their equity of redemption right and keep their home from being seized and sold. This can be done by selling the property at market value to raise funds to pay off the debt, or through a mortgage refinance, whereby some of the borrower’s other assets, such as investments, are used as collateral to reduce the debt to an affordable level.
The Benefits of Equity of Redemption
Of course, the primary benefit of invoking the equity of redemption right is that it allows borrowers to keep their homes. It also helps protect the lender from losses due to defaulting clients, as the lender will be able to receive at least a portion of the debt owed.
Conclusion:
In summary, equity of redemption is an important legal right that allows borrowers to retain ownership of their properties in the event of foreclosure. It provides lenders with some protection, and helps borrowers preserve the equity they have built up in their homes.