Equity release & lifetime mortgage are the 2 most commonly used phrases to describe the release of equity from a property – however which time period is technically correct?
Expertise has shown that confusion arises when both terms – equity launch & lifetime mortgage are utilized in the same sentence. Folks have been known to request an equity release plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion around the usage of these mortgage terms.
The word ‘equity release’ is used as a generic time period 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 out of your property, you’re releasing the spare quantity of capital available in the property, to make use of for personal expenditure purposes.
However, the time period equity release can apply to various methods of releasing equity. These may embody a further advance on a standard mortgage, or, as discussed specifically in this article, a special type of mortgage for the over 55’s.
So what’s the difference 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 fifty five’s encompasses the 2 types of schemes available; lifetime mortgages & house reversion schemes.
Of these 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 will be released within the form of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the original amount borrowed is charged a fixed rate of curiosity which is then added annually by the lender. However, unlike a conventional mortgage there are no month-to-month repayments to make.
This process continues for the duration of the occupants life, till 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 own home to the scheme provider (reversion firm) in return for regular revenue or a tax free lump sum or both, and continue to live in your home. You receive a lifetime tenancy within the property & normally live there rent free till loss of life or moving into long run care.
At this level, the property is then sold & the reversion firm will acquire its money. The amount they receive can be a percentage 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’ll then receive 60% of the eventual sale proceeds, whether or not this is lower 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 might be, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion company can subsequently provide more favourable terms.
These schemes therefore guarantee a share of the eventual sale proceeds to the beneficiaries & generally will 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, shall be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds annually & will proceed to do so as long as the occupier is resident. This might finally outcome within the balance surpassing the worth of the property, which in impact would end in negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products embrace a no negative equity assure, which signifies that ought to 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 by no means owe more than the value of the property.
The no negative equity guarantee is provided at no additional price to the borrower.
Therefore in summary, the time period equity launch is a generic time period commonly used to encompass each lifetime mortgages & home reversion schemes.
It may very well be excused for a member of the public to get confused as to which term is appropriate, however a qualified equity release adviser ought to know the distinction & clarify accordingly!
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