Equity launch & lifetime mortgage are the 2 most commonly used terms to explain the discharge of equity from a property – but which time period is technically appropriate?
Experience has shown that confusion arises when both terms – 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 attempt to allay misconceptions & confusion round using these mortgage terms.
The word ‘equity release’ 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 fees made in opposition to it.
By releasing equity out of your property, you might be liberating the spare amount of capital available within the property, to use for personal expenditure purposes.
Nevertheless, the term equity launch can apply to numerous methods of releasing equity. These may embrace a further advance on a conventional mortgage, or, as discussed specifically in this article, a special type of mortgage for the over 55’s.
So what is the distinction between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity launch come into play & establish the product variations. Equity launch for the over fifty five’s encompasses the two types of schemes available; lifetime mortgages & house reversion schemes.
Of those two schemes a lifetime mortgage is the most common & 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 can 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 yearly by the lender. Nevertheless, unlike a traditional mortgage there are not any month-to-month repayments to make.
This process continues throughout the occupants life, till they die or move into long run care. At that point 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 home 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 receive a lifetime tenancy within the property & normally live there lease free till dying or moving into long term care.
At this level, the property is then sold & the reversion firm will accumulate its money. The quantity they obtain will likely be a proportion 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 may then receive 60% of the eventual sale proceeds, whether or not 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’re, the shorter your life expectancy & thus the lender probably realises their capital quicker. As a consequence, the reversion firm can therefore offer more favourable terms.
These schemes therefore guarantee a share of the eventual sale proceeds to the beneficiaries & generally will probably be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such assure as to how much equity, if anything, will likely be left for the beneficiaries.
This is because of the truth that the rolled-up curiosity compounds yearly & will proceed to take action as long as the occupier is resident. This might eventually end result 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 guarantee, which implies that should the balance of the mortgage be better 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 value of the property.
The no negative equity assure is provided at no additional cost to the borrower.
Therefore in summary, the term equity release is a generic time period commonly used to encompass both lifetime mortgages & house reversion schemes.
It could be excused for a member of the public to get confused as to which term is appropriate, however a certified equity release adviser should know the distinction & explain accordingly!
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