Equity launch & lifetime mortgage are the two most commonly used terms to describe the discharge of equity from a property – but which term is technically appropriate?
Experience has shown that confusion arises when each phrases – equity release & lifetime mortgage are utilized in the identical sentence. Individuals have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try and allay misconceptions & confusion round the usage of these two 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 expenses made in opposition to it.
By releasing equity out of your property, you are freeing the spare amount of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the term equity launch can apply to numerous strategies of releasing equity. These could embody an additional advance on a traditional mortgage, or, as mentioned 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 where the additional definitions of equity launch come into play & identify the product variations. Equity release for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & house reversion schemes.
Of those two schemes a lifetime mortgage is the most common & is basically a loan secured on the home which releases tax free money for the applicant to spend as they wish.
The tax free money could be launched within the type of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the original amount borrowed is charged a fixed rate of interest which is then added annually by the lender. Nevertheless, unlike a standard mortgage there aren’t any monthly repayments to make.
This process continues all through the occupants life, till they die or move into long term care. At that point 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 launch is a Home Reversion scheme. In essence, you sell all or a part of your private home to the scheme provider (reversion firm) in return for regular earnings or a tax free lump sum or each, and continue to live in your home. You receive a lifetime tenancy in the property & normally live there lease free until loss of life or moving into long run care.
At this point, the property is then sold & the reversion company will gather its money. The quantity they obtain shall 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 company, they are going to then receive 60% of the eventual sale proceeds, whether or not this is decrease 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 might be, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion company can therefore supply more favourable terms.
These schemes subsequently assure a percentage of the eventual sale proceeds to the beneficiaries & generally shall 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, will probably be left for the beneficiaries.
This is due to the fact that the rolled-up curiosity compounds annually & will continue to do so so long as the occupier is resident. This might finally result within the balance surpassing the worth of the property, which in effect would end in negative equity situation.
Nevertheless, all SHIP (Safe Home Income Plans) approved products embody a no negative equity guarantee, which implies that should the balance of the mortgage be higher than the eventual sale of the property, then the lender will only ask for the worth of the property. This assure ensures the beneficiaries by no means owe more than the value of the property.
The no negative equity guarantee is provided at no additional cost 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 general public to get confused as to which time period is correct, nevertheless a certified equity launch adviser ought to know the difference & clarify accordingly!