Equity launch & lifetime mortgage are the two most commonly used terms to explain the discharge of equity from a property – but which time period is technically correct?
Experience has shown that confusion arises when each terms – equity release & lifetime mortgage are used in the same sentence. People have been known to request an equity release plan, but not a lifetime mortgage!
This article will try and allay misconceptions & confusion around the use of these two mortgage terms.
The word ‘equity launch’ is used as a generic term identifying the withdrawal of capital from your property. ‘Equity’ being the value of an asset, less any loans or fees made in opposition to it.
By releasing equity out of your property, you’re liberating the spare quantity of capital available within the property, to make use of for personal expenditure purposes.
Nevertheless, the term equity launch can apply to varied strategies of releasing equity. These may embrace an additional advance on a traditional 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 release for the over 55’s encompasses the two types of schemes available; lifetime mortgages & dwelling reversion schemes.
Of these 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 might be launched within the form of an revenue or more commonly a capital lump sum.
With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of interest which is then added annually by the lender. However, unlike a traditional mortgage there are no monthly repayments to make.
This process continues during 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 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 a part of your property to the scheme provider (reversion company) in return for normal earnings or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy in the property & normally live there lease free until death or moving into long term care.
At this level, 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 much 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 obtain 60% of the eventual sale proceeds, whether this is lower or higher than the original 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 firm can due to this fact supply more favourable terms.
These schemes subsequently guarantee a share of the eventual sale proceeds to the beneficiaries & generally can 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, shall be left for the beneficiaries.
This is due to the fact that the rolled-up interest compounds yearly & will continue to do so so long as the occupier is resident. This may ultimately result within the balance surpassing the worth of the property, which in effect would lead to negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products embrace 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 assure ensures the beneficiaries never owe more than the value of the property.
The no negative equity assure is provided at no additional cost to the borrower.
Therefore in abstract, the term equity launch is a generic term 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 appropriate, however a professional equity launch adviser ought to know the distinction & explain accordingly!
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