Equity release & lifetime mortgage are the 2 most commonly used terms to explain the discharge of equity from a property – however which time period is technically appropriate?
Expertise has shown that confusion arises when both phrases – equity launch & lifetime mortgage are used in the same sentence. Folks have been known to request an equity release plan, however not a lifetime mortgage!
This article will try to allay misconceptions & confusion round the usage of these two mortgage terms.
The word ‘equity launch’ is used as a generic term identifying the withdrawal of capital out of your property. ‘Equity’ being the value of an asset, less any loans or charges made towards it.
By releasing equity from your property, you might be releasing the spare quantity of capital available in the property, to use for personal expenditure purposes.
Nonetheless, the time period equity launch can apply to various methods of releasing equity. These may embrace a further advance on a conventional mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over 55’s.
So what is the difference between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is the place the additional definitions of equity launch come into play & identify 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 cash for the applicant to spend as they wish.
The tax free money might be released in the form 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. Nonetheless, unlike a traditional mortgage there are no month-to-month repayments to make.
This process continues in the course of the occupants life, until 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 property to the scheme provider (reversion company) in return for regular earnings or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy within the property & often live there rent free until death or moving into long run care.
At this point, the property is then sold & the reversion firm will accumulate its money. The quantity 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 will 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 company can due to this fact supply 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 a lot equity, if anything, will probably be left for the beneficiaries.
This is due to the truth that the rolled-up interest compounds yearly & will continue to take action so long as the occupier is resident. This might ultimately outcome within the balance surpassing the value of the property, which in impact would lead to negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products embrace a no negative equity guarantee, which signifies 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 never owe more than the worth of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Therefore in abstract, the term equity release is a generic time period commonly used to encompass both lifetime mortgages & home reversion schemes.
It could be excused for a member of the public to get confused as to which time period is right, however a certified equity launch adviser ought to know the distinction & clarify accordingly!
To learn more info on Equity release costs look into the web site.