Equity launch & lifetime mortgage are the two most commonly used phrases to describe the release of equity from a property – but which time period is technically correct?
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, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion round using these mortgage terms.
The word ‘equity release’ is used as a generic term figuring out the withdrawal of capital out of your property. ‘Equity’ being the value of an asset, less any loans or prices made against it.
By releasing equity from your property, you are freeing the spare quantity of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the term equity release can apply to various methods of releasing equity. These might embrace a further advance on a conventional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over fifty five’s.
So what is the difference between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity release come into play & establish the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & residence reversion schemes.
Of these schemes a lifetime mortgage is the most common & is basically a loan secured on the home which releases tax free money for the applicant to spend as they wish.
The tax free money will be released within the type of an revenue 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 yearly by the lender. Nevertheless, unlike a conventional mortgage there are no month-to-month repayments to make.
This process continues in the course of the occupants life, till 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 a part of your house to the scheme provider (reversion company) in return for normal revenue or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy in the property & often live there lease free till death or moving into long term care.
At this level, the property is then sold & the reversion firm will gather its money. The amount they receive will likely be a percentage 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’ll 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 firm can therefore offer more favourable terms.
These schemes due to this fact guarantee a proportion of the eventual sale proceeds to the beneficiaries & generally shall be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such assure as to how much equity, if anything, will likely be left for the beneficiaries.
This is because of the fact that the rolled-up curiosity compounds yearly & will proceed to do so so long as the occupier is resident. This might eventually end result within the balance surpassing the value of the property, which in effect would result in negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products embody a no negative equity assure, which means that should 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 guarantee ensures the beneficiaries by no means owe more than the value of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Due to this fact in summary, the time period equity launch is a generic term 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 term is appropriate, nevertheless a qualified equity launch adviser ought to know the difference & clarify accordingly!