Equity launch & lifetime mortgage are the 2 most commonly used terms to explain the discharge of equity from a property – however which time period is technically correct?
Expertise has shown that confusion arises when each terms – equity launch & lifetime mortgage are utilized in the same sentence. Folks have been known to request an equity release plan, however not a lifetime mortgage!
This article will try to allay misconceptions & confusion round using these mortgage terms.
The word ‘equity release’ is used as a generic time period identifying the withdrawal of capital from your property. ‘Equity’ being the value of an asset, less any loans or costs made towards it.
By releasing equity out of your property, you are liberating the spare quantity of capital available in the property, to use for personal expenditure purposes.
Nonetheless, the time period equity release can apply to various methods of releasing equity. These might include an additional advance on a conventional mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over 55’s.
So what is the distinction between equity launch & a lifetime mortgage & how can they be differentiated?
Well, this is the place the additional definitions of equity release come into play & determine the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & residence reversion schemes.
Of those two schemes a lifetime mortgage is the most typical & is basically a loan secured on the house which releases tax free cash for the applicant to spend as they wish.
The tax free cash might be released in the form of an revenue or more commonly a capital lump sum.
With a lifetime mortgage, the original amount borrowed is charged a fixed rate of curiosity which is then added annually by the lender. Nonetheless, unlike a traditional mortgage there are not any month-to-month repayments to make.
This process continues at some point of the occupants life, until they die or move into long term care. At that time the beneficiaries will sell the property. The sale proceeds will then pay off the lender, with the remaining balance distributed in accordance with the estates wishes.
The second type of equity release is a Home Reversion scheme. In essence, you sell all or part of your property to the scheme provider (reversion company) in return for normal earnings or a tax free lump sum or both, and continue to live in your home. You obtain a lifetime tenancy within the property & usually live there rent free until loss of life or moving into long term care.
At this point, the property is then sold & the reversion company will accumulate its money. The quantity they obtain will be a proportion of the sale proceeds, dependent upon how a lot of the property was sold to them initially. e.g. if 60% of the property was sold to the reversion firm, they may then receive 60% of the eventual sale proceeds, whether this is lower or higher than the unique value.
Home reversion schemes are more suitable for the older age group; typically age 70+. The reason being, the older you’re, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion company can therefore offer more favourable terms.
These schemes therefore guarantee a percentage of the eventual sale proceeds to the beneficiaries & generally will likely be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such assure as to how a lot equity, if anything, shall be left for the beneficiaries.
This is because of the fact that the rolled-up curiosity compounds annually & will continue to do so so long as the occupier is resident. This might ultimately outcome in the balance surpassing the value of the property, which in effect would result in negative equity situation.
Nonetheless, all SHIP (Safe Home Income Plans) approved products embody a no negative equity assure, which signifies that should the balance of the mortgage be higher than the eventual sale of the property, then the lender will only ask for the value of the property. This assure ensures the beneficiaries never owe more than the value of the property.
The no negative equity guarantee is provided at no additional value to the borrower.
Therefore in summary, the term equity release is a generic term commonly used to encompass both lifetime mortgages & dwelling reversion schemes.
It could possibly be excused for a member of the public to get confused as to which term is appropriate, nonetheless a qualified equity release adviser should know the difference & clarify accordingly!