Equity release & lifetime mortgage are the two most commonly used phrases to describe the release of equity from a property – but which term is technically right?
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 and allay misconceptions & confusion around the use of these mortgage terms.
The word ‘equity launch’ is used as a generic term figuring out the withdrawal of capital out of your property. ‘Equity’ being the worth of an asset, less any loans or prices made against it.
By releasing equity from your property, you might be 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 could include an additional advance on a conventional mortgage, or, as mentioned specifically in this article, a special type of mortgage for the over 55’s.
So what is the distinction between equity launch & 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 2 types of schemes available; lifetime mortgages & residence reversion schemes.
Of those schemes a lifetime mortgage is the most typical & is basically a loan secured on the home which releases tax free money for the applicant to spend as they wish.
The tax free cash might be released within the form of an revenue or more commonly a capital lump sum.
With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of curiosity which is then added annually by the lender. Nonetheless, unlike a conventional mortgage there aren’t any month-to-month repayments to make.
This process continues at some stage in 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 regular income or a tax free lump sum or each, and proceed to live in your home. You receive a lifetime tenancy in the property & normally live there hire free until loss of life or moving into long run care.
At this point, the property is then sold & the reversion firm will gather its money. The quantity they receive can be a percentage 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 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 are, the shorter your life expectancy & thus the lender probably realises their capital quicker. As a consequence, the reversion company can subsequently offer more favourable terms.
These schemes therefore assure a share of the eventual sale proceeds to the beneficiaries & generally will probably be used for this reason.
On the contrary, a roll-up lifetime mortgage has generally no such guarantee as to how much equity, if anything, will be left for the beneficiaries.
This is due to the truth that the rolled-up interest compounds yearly & will proceed to take action so long as the occupier is resident. This may ultimately consequence in the balance surpassing the value of the property, which in effect would end in negative equity situation.
However, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity assure, which signifies 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 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 value to the borrower.
Subsequently in abstract, the term equity launch is a generic time period commonly used to encompass both lifetime mortgages & dwelling reversion schemes.
It could possibly be excused for a member of the general public to get confused as to which time period is right, nevertheless a professional equity release adviser ought to know the distinction & clarify accordingly!