Equity launch & lifetime mortgage are the 2 most commonly used terms to describe the discharge of equity from a property – however which term is technically appropriate?
Experience has shown that confusion arises when each terms – equity launch & lifetime mortgage are used in the same sentence. Individuals have been known to request an equity release plan, however not a lifetime mortgage!
This article will try to allay misconceptions & confusion around using these two mortgage terms.
The word ‘equity launch’ is used as a generic term figuring out the withdrawal of capital from your property. ‘Equity’ being the worth of an asset, less any loans or fees made towards it.
By releasing equity from your property, you are liberating the spare amount of capital available within the property, to make use of for personal expenditure purposes.
However, the time period equity launch can apply to varied strategies of releasing equity. These may include an additional advance on a standard 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 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 these two schemes a lifetime mortgage is the most common & is basically a loan secured on the house which releases tax free money for the applicant to spend as they wish.
The tax free cash could be launched in the type of an revenue or more commonly a capital lump sum.
With a lifetime mortgage, the original quantity borrowed is charged a fixed rate of interest which is then added annually by the lender. Nonetheless, unlike a conventional mortgage there are no month-to-month repayments to make.
This process continues at some stage in the occupants life, until they die or move into long term care. At that point the beneficiaries will sell the property. The sale proceeds will then pay off 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 regular income or a tax free lump sum or both, and continue to live in your home. You receive a lifetime tenancy within the property & usually live there rent free till death or moving into long run care.
At this point, the property is then sold & the reversion firm will collect its money. The quantity they obtain can 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 company, they will then receive 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 are, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can due to this fact supply more favourable terms.
These schemes therefore assure a proportion of the eventual sale proceeds to the beneficiaries & generally will likely be used for this reason.
On the contrary, 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 fact that the rolled-up interest compounds yearly & will proceed to take action so long as the occupier is resident. This could eventually consequence within the balance surpassing the worth of the property, which in effect would result in negative equity situation.
Nevertheless, all SHIP (Safe Home Income Plans) approved products embrace a no negative equity assure, 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 by no means owe more than the worth of the property.
The no negative equity assure is provided at no additional value to the borrower.
Due to this fact in abstract, the term equity launch is a generic term commonly used to encompass each lifetime mortgages & dwelling reversion schemes.
It could be excused for a member of the public to get confused as to which time period is right, nonetheless a qualified equity launch adviser should know the distinction & clarify accordingly!