Equity release & lifetime mortgage are the 2 most commonly used terms to explain the release of equity from a property – but which time period is technically correct?
Experience has shown that confusion arises when both terms – equity launch & lifetime mortgage are utilized in the identical sentence. Individuals have been known to request an equity release plan, but not a lifetime mortgage!
This article will attempt to allay misconceptions & confusion round using these mortgage terms.
The word ‘equity launch’ is used as a generic time period identifying the withdrawal of capital out of your property. ‘Equity’ being the worth of an asset, less any loans or costs made towards it.
By releasing equity from your property, you’re freeing the spare quantity of capital available in the property, to use for personal expenditure purposes.
Nonetheless, the term equity release can apply to numerous strategies of releasing equity. These might embody an additional advance on a conventional mortgage, or, as mentioned specifically in this article, a special type of mortgage for the over fifty five’s.
So what’s the distinction between equity launch & 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 launch for the over fifty five’s encompasses the two types of schemes available; lifetime mortgages & residence reversion schemes.
Of these 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 cash could be released within the form 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. However, unlike a standard mortgage there aren’t any month-to-month repayments to make.
This process continues in the course of the occupants life, until 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 home to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy within the property & usually live there rent free until death or moving into long run care.
At this level, the property is then sold & the reversion company will acquire its money. The quantity they obtain shall be a share 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 may 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 doubtlessly realises their capital quicker. As a consequence, the reversion company can subsequently offer more favourable terms.
These schemes therefore guarantee a percentage 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 a lot equity, if anything, will probably be left for the beneficiaries.
This is due to the truth that the rolled-up curiosity compounds yearly & will proceed to take action as long as the occupier is resident. This may finally result in the balance surpassing the worth of the property, which in impact would end in negative equity situation.
Nonetheless, all SHIP (Safe Home Earnings Plans) approved products embody a no negative equity guarantee, which signifies that ought to 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 guarantee ensures the beneficiaries by no means owe more than the value of the property.
The no negative equity assure is provided at no additional value to the borrower.
Therefore in summary, the term equity release is a generic term commonly used to encompass both lifetime mortgages & home reversion schemes.
It may very well be excused for a member of the general public to get confused as to which term is correct, nevertheless a professional equity launch adviser ought to know the distinction & clarify accordingly!