Equity release & lifetime mortgage are the 2 most commonly used terms to describe the release of equity from a property – however which time period is technically correct?
Expertise has shown that confusion arises when both terms – equity release & lifetime mortgage are used in the same sentence. Individuals have been known to request an equity release plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion round using 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 fees made towards it.
By releasing equity from your property, you’re releasing the spare quantity of capital available within the property, to use for personal expenditure purposes.
However, the term equity launch can apply to varied methods of releasing equity. These may include an additional advance on a conventional mortgage, or, as mentioned specifically in this article, a special 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 release for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & residence reversion schemes.
Of those 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 money can be launched 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. Nevertheless, unlike a traditional mortgage there are no month-to-month repayments to make.
This process continues during the occupants life, until 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 release is a Home Reversion scheme. In essence, you sell all or a part of your house to the scheme provider (reversion company) in return for normal earnings or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy in the property & normally live there hire free till death or moving into long run care.
At this level, the property is then sold & the reversion firm will accumulate its money. The amount they receive will likely 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 firm, they’ll then receive 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 are, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion firm can due to this fact provide more favourable terms.
These schemes due to this fact guarantee a percentage of the eventual sale proceeds to the beneficiaries & generally will probably be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such guarantee as to how a lot equity, if anything, shall be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds annually & will proceed to take action so long as the occupier is resident. This could 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 include a no negative equity guarantee, which means 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 value of the property. This assure ensures the beneficiaries by no means owe more than the worth of the property.
The no negative equity assure is provided at no additional price to the borrower.
Subsequently in abstract, the time period equity launch is a generic time period commonly used to encompass both lifetime mortgages & house reversion schemes.
It could be excused for a member of the general public to get confused as to which time period is correct, nevertheless a qualified equity release adviser ought to know the distinction & explain accordingly!
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