Equity launch & lifetime mortgage are the two most commonly used phrases to explain the discharge of equity from a property – however which time period is technically right?
Experience has shown that confusion arises when both terms – equity release & lifetime mortgage are utilized in the same sentence. Individuals have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion around the use of these two mortgage terms.
The word ‘equity launch’ is used as a generic term identifying the withdrawal of capital from your property. ‘Equity’ being the worth of an asset, less any loans or fees made in opposition to it.
By releasing equity out of your property, you’re freeing the spare quantity of capital available in the property, to make use of for personal expenditure purposes.
Nonetheless, the time period equity release can apply to various methods of releasing equity. These might embrace a further advance on a traditional 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 where the additional definitions of equity launch come into play & establish the product variations. Equity release for the over fifty five’s encompasses the 2 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 home which releases tax free cash for the applicant to spend as they wish.
The tax free cash can be released within the type of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of interest which is then added annually by the lender. However, unlike a conventional mortgage there are no monthly 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 own home to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or each, and continue to live in your home. You receive a lifetime tenancy within the property & usually live there hire free until dying or moving into long run care.
At this point, the property is then sold & the reversion company will acquire its money. The quantity they receive shall 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’ll then receive 60% of the eventual sale proceeds, whether 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’re, 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 subsequently assure a share of the eventual sale proceeds to the beneficiaries & generally can be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such guarantee as to how a lot equity, if anything, will be left for the beneficiaries.
This is because of the fact that the rolled-up curiosity compounds annually & will proceed to do so so long as the occupier is resident. This may eventually result in the balance surpassing the worth of the property, which in impact would end in negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products embody 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 value of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Therefore in summary, the term equity launch is a generic term commonly used to encompass both lifetime mortgages & residence reversion schemes.
It might be excused for a member of the public to get confused as to which term is right, however a qualified equity release adviser should know the distinction & clarify accordingly!