Equity release & lifetime mortgage are the 2 most commonly used terms to explain the release of equity from a property – but which term is technically correct?
Expertise has shown that confusion arises when each phrases – equity launch & lifetime mortgage are used in the identical sentence. Individuals have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try and allay misconceptions & confusion around the usage of these mortgage terms.
The word ‘equity release’ is used as a generic term figuring out 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 freeing the spare quantity of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the time period equity launch can apply to various methods of releasing equity. These may embody an additional advance on a standard mortgage, or, as mentioned specifically in this article, a special type of mortgage for the over 55’s.
So what’s the difference 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 & establish the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & house reversion schemes.
Of those two 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 cash may be released in the type of an earnings 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 standard mortgage there are no monthly repayments to make.
This process continues all through the occupants life, till they die or move into long run 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 house to the scheme provider (reversion company) in return for normal income or a tax free lump sum or both, and continue to live in your home. You receive a lifetime tenancy within the property & normally live there rent free till dying or moving into long term care.
At this point, the property is then sold & the reversion company will acquire its money. The amount they receive shall 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 company, they are going to then receive 60% of the eventual sale proceeds, whether or not this is decrease 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’re, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can due to this fact offer more favourable terms.
These schemes therefore guarantee a proportion of the eventual sale proceeds to the beneficiaries & generally might be used for this reason.
On the contrary, a roll-up lifetime mortgage has generally no such assure as to how much equity, if anything, might be left for the beneficiaries.
This is due to the truth that the rolled-up interest compounds yearly & will continue to do so so long as the occupier is resident. This might finally outcome within the balance surpassing the worth of the property, which in impact would lead to negative equity situation.
However, all SHIP (Safe Home Revenue Plans) approved products include a no negative equity guarantee, which means that should the balance of the mortgage be higher than the eventual sale of the property, then the lender will only ask for the value 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 price to the borrower.
Therefore in summary, the time period equity release is a generic time period commonly used to encompass both lifetime mortgages & residence reversion schemes.
It could be excused for a member of the general public to get confused as to which time period is right, however a qualified equity release adviser ought to know the distinction & explain accordingly!
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