Equity release & lifetime mortgage are the two most commonly used terms to explain the release of equity from a property – but which time period is technically correct?
Expertise has shown that confusion arises when both phrases – equity release & lifetime mortgage are used in the identical sentence. People have been known to request an equity release plan, but not a lifetime mortgage!
This article will attempt to allay misconceptions & confusion around using these mortgage terms.
The word ‘equity release’ is used as a generic time period identifying the withdrawal of capital out of your property. ‘Equity’ being the worth of an asset, less any loans or expenses made in opposition to it.
By releasing equity from your property, you are freeing the spare amount of capital available within the property, to use for personal expenditure purposes.
Nevertheless, the time period equity launch can apply to numerous strategies of releasing equity. These could include an additional advance on a standard mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over 55’s.
So what is the difference between equity launch & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity launch come into play & determine the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & dwelling reversion schemes.
Of those schemes a lifetime mortgage is the commonest & is basically a loan secured on the house which releases tax free money for the applicant to spend as they wish.
The tax free cash can be launched within the form of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the unique amount borrowed is charged a fixed rate of interest which is then added annually by the lender. Nonetheless, unlike a standard mortgage there aren’t any month-to-month repayments to make.
This process continues at some stage in 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 part of your house to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or each, and continue to live in your home. You obtain a lifetime tenancy within the property & often live there rent free till demise or moving into long run care.
At this level, the property is then sold & the reversion firm will acquire its money. The quantity they obtain can be a percentage 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 will 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 are, the shorter your life expectancy & thus the lender probably realises their capital quicker. As a consequence, the reversion company can therefore provide more favourable terms.
These schemes subsequently guarantee a proportion of the eventual sale proceeds to the beneficiaries & generally might be used for this reason.
On the contrary, a roll-up lifetime mortgage has generally no such guarantee as to how a lot equity, if anything, will probably be left for the beneficiaries.
This is due to the truth that the rolled-up curiosity compounds annually & will proceed to take action so long as the occupier is resident. This may finally result within the balance surpassing the worth of the property, which in effect would result in negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products embody a no negative equity assure, which signifies that ought to the balance of the mortgage be greater than the eventual sale of the property, then the lender will only ask for the worth 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 cost to the borrower.
Subsequently in summary, the term equity launch is a generic term commonly used to encompass both lifetime mortgages & residence reversion schemes.
It could be excused for a member of the public to get confused as to which time period is correct, however a certified equity release adviser should know the difference & clarify accordingly!