Equity launch & lifetime mortgage are the two most commonly used terms to explain the release of equity from a property – but which term is technically appropriate?
Experience has shown that confusion arises when both terms – equity launch & lifetime mortgage are utilized in the same sentence. Individuals have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion around the use of 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 charges made against it.
By releasing equity from 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 release can apply to varied strategies of releasing equity. These might embody 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’s the difference between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity launch come into play & identify the product variations. Equity release for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & home reversion schemes.
Of those two schemes a lifetime mortgage is the most typical & is basically a loan secured on the home which releases tax free cash for the applicant to spend as they wish.
The tax free money may be released within the form of an income 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. Nevertheless, unlike a standard mortgage there aren’t any month-to-month repayments to make.
This process continues during 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 release is a Home Reversion scheme. In essence, you sell all or a part of your private home to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or both, and continue to live in your home. You obtain a lifetime tenancy within the property & often live there lease free till dying or moving into long term care.
At this point, the property is then sold & the reversion firm will collect its money. The amount they obtain will be a share of the sale proceeds, dependent upon how a lot 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 decrease 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’re, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion firm can subsequently supply more favourable terms.
These schemes due to this fact assure 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 much equity, if anything, will be left for the beneficiaries.
This is due to the truth that the rolled-up curiosity compounds annually & will continue to take action so long as the occupier is resident. This may finally end result within the balance surpassing the value of the property, which in effect would lead to negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity guarantee, which means that ought to the balance of the mortgage be greater 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 worth of the property.
The no negative equity guarantee is provided at no additional value to the borrower.
Therefore in summary, the term equity release is a generic term commonly used to encompass each lifetime mortgages & residence reversion schemes.
It could be excused for a member of the public to get confused as to which term is correct, nonetheless a qualified equity release adviser ought to know the difference & clarify accordingly!