Equity release & lifetime mortgage are the 2 most commonly used phrases to describe the discharge of equity from a property – but which term is technically right?
Experience has shown that confusion arises when both terms – equity release & lifetime mortgage are utilized in the same sentence. People have been known to request an equity launch plan, however not a lifetime mortgage!
This article will try and allay misconceptions & confusion around using these two mortgage terms.
The word ‘equity release’ is used as a generic term figuring out the withdrawal of capital from your property. ‘Equity’ being the worth of an asset, less any loans or fees made in opposition to it.
By releasing equity out of your property, you might be releasing the spare quantity of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the time period equity launch can apply to varied strategies of releasing equity. These could include a further 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 release & a lifetime mortgage & how can they be differentiated?
Well, this is the place the additional definitions of equity release come into play & identify the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & residence reversion schemes.
Of those schemes a lifetime mortgage is the commonest & is basically a loan secured on the house which releases tax free cash for the applicant to spend as they wish.
The tax free money might be released within the type of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the original quantity borrowed is charged a fixed rate of interest which is then added annually by the lender. However, unlike a conventional mortgage there aren’t any monthly repayments to make.
This process continues all through 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 repay 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 home to the scheme provider (reversion company) in return for normal revenue or a tax free lump sum or both, and continue to live in your home. You receive a lifetime tenancy in the property & often live there hire free until demise or moving into long term care.
At this point, the property is then sold & the reversion firm will acquire its money. The amount they obtain will likely be a share of the sale proceeds, dependent upon how much of the property was sold to them initially. e.g. if 60% of the property was sold to the reversion firm, they will then obtain 60% of the eventual sale proceeds, whether or not 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 firm can subsequently offer more favourable terms.
These schemes subsequently assure a proportion 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 guarantee as to how much equity, if anything, will likely be left for the beneficiaries.
This is due to the truth that the rolled-up interest compounds annually & will proceed to take action as long as the occupier is resident. This may ultimately outcome in the balance surpassing the worth of the property, which in impact would end in negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products embrace a no negative equity guarantee, which signifies that ought to the balance of the mortgage be better 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 worth of the property.
The no negative equity guarantee is provided at no additional price to the borrower.
Due to this fact in abstract, the term equity release is a generic time period commonly used to encompass each lifetime mortgages & home reversion schemes.
It could be excused for a member of the general public to get confused as to which time period is correct, however a certified equity launch adviser ought to know the difference & clarify accordingly!