Equity launch & lifetime mortgage are the 2 most commonly used phrases to describe the release of equity from a property – however which time period is technically right?
Experience has shown that confusion arises when both terms – equity launch & lifetime mortgage are utilized in the same sentence. Folks have been known to request an equity release plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion round the usage of these mortgage terms.
The word ‘equity launch’ 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 charges made against it.
By releasing equity out of your property, you are releasing the spare quantity of capital available in the property, to use for personal expenditure purposes.
However, the term equity launch can apply to various methods of releasing equity. These might embrace an extra advance on a conventional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over 55’s.
So what’s the distinction between equity launch & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity release come into play & determine the product variations. Equity launch for the over fifty five’s encompasses the 2 types of schemes available; lifetime mortgages & house 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 money for the applicant to spend as they wish.
The tax free cash might be released in the type 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. However, unlike a conventional mortgage there aren’t any month-to-month repayments to make.
This process continues for the duration of the occupants life, till they die or move into long run 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 release is a Home Reversion scheme. In essence, you sell all or a part of your property to the scheme provider (reversion firm) in return for regular earnings or a tax free lump sum or both, and proceed to live in your home. You obtain a lifetime tenancy within the property & normally live there hire free till loss of life or moving into long term care.
At this level, the property is then sold & the reversion firm will gather 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 might be, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion company can subsequently provide more favourable terms.
These schemes therefore assure a proportion of the eventual sale proceeds to the beneficiaries & generally will be used for this reason.
On the contrary, 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 truth that the rolled-up curiosity compounds yearly & will proceed to do so as long as the occupier is resident. This might eventually result within the balance surpassing the worth of the property, which in impact would lead to negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity guarantee, which means that should the balance of the mortgage be larger than the eventual sale of the property, then the lender will only ask for the value of the property. This guarantee ensures the beneficiaries never owe more than the worth of the property.
The no negative equity assure is provided at no additional value to the borrower.
Therefore in summary, the time period equity launch is a generic time period commonly used to encompass each lifetime mortgages & house reversion schemes.
It could possibly be excused for a member of the general public to get confused as to which time period is right, however a certified equity launch adviser should know the distinction & explain accordingly!
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