Equity release & lifetime mortgage are the 2 most commonly used terms to describe the release 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 identical sentence. Individuals have been known to request an equity release plan, however not a lifetime mortgage!
This article will try and allay misconceptions & confusion round the use of these two mortgage terms.
The word ‘equity launch’ is used as a generic time period figuring out the withdrawal of capital from your property. ‘Equity’ being the worth of an asset, less any loans or charges made in opposition to it.
By releasing equity out of your property, you might be liberating the spare quantity of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the time period equity launch can apply to varied strategies of releasing equity. These could include an extra advance on a conventional mortgage, or, as mentioned specifically in this article, a special type of mortgage for the over 55’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 & establish the product variations. Equity launch for the over fifty five’s encompasses the two types of schemes available; lifetime mortgages & dwelling reversion schemes.
Of those two 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 money may be launched in the type of an revenue 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. Nevertheless, unlike a conventional mortgage there are no monthly repayments to make.
This process continues in the course of 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 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 house to the scheme provider (reversion company) in return for regular earnings or a tax free lump sum or both, and continue to live in your home. You obtain a lifetime tenancy in the property & often live there lease free till loss of life or moving into long run care.
At this level, the property is then sold & the reversion firm will gather its money. The amount they obtain shall be a share 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 are going to 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 are, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion company can therefore offer more favourable terms.
These schemes due to this fact guarantee a share of the eventual sale proceeds to the beneficiaries & generally will 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 yearly & will proceed to take action as long as the occupier is resident. This could eventually end result in the balance surpassing the value of the property, which in impact would result in negative equity situation.
However, all SHIP (Safe Home Income Plans) approved products embrace a no negative equity guarantee, which means that should 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 assure ensures the beneficiaries never owe more than the worth 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 term commonly used to encompass each lifetime mortgages & dwelling reversion schemes.
It might be excused for a member of the public to get confused as to which time period is appropriate, nevertheless a certified equity release adviser should know the difference & explain accordingly!