Equity release & lifetime mortgage are the two most commonly used phrases to explain the release of equity from a property – however which term is technically right?
Experience has shown that confusion arises when each phrases – equity launch & lifetime mortgage are used 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 the usage of these mortgage terms.
The word ‘equity launch’ is used as a generic time period identifying the withdrawal of capital from your property. ‘Equity’ being the value of an asset, less any loans or prices made against it.
By releasing equity from your property, you might be releasing the spare quantity of capital available within the property, to use for personal expenditure purposes.
Nevertheless, the term equity launch can apply to varied strategies of releasing equity. These may embrace an additional advance on a standard mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over 55’s.
So what’s the difference between equity release & 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 launch for the over fifty five’s encompasses the two types of schemes available; lifetime mortgages & home reversion schemes.
Of those two schemes a lifetime mortgage is the commonest & 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 may be launched within the type of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the original quantity borrowed is charged a fixed rate of curiosity which is then added annually by the lender. However, unlike a standard mortgage there are not any 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 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 proceed to live in your home. You obtain a lifetime tenancy within the property & often live there rent free until dying or moving into long run care.
At this level, the property is then sold & the reversion firm will gather its money. The quantity they receive might 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 firm, they’ll then receive 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 firm can subsequently offer more favourable terms.
These schemes subsequently assure a proportion of the eventual sale proceeds to the beneficiaries & generally shall 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 truth that the rolled-up interest compounds yearly & will continue to take action as long as the occupier is resident. This could eventually consequence in the balance surpassing the value of the property, which in effect would end in negative equity situation.
However, all SHIP (Safe Home Income Plans) approved products embody a no negative equity assure, 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 worth of the property. This assure ensures the beneficiaries never owe more than the worth of the property.
The no negative equity assure is provided at no additional cost to the borrower.
Therefore in summary, the term equity launch is a generic time period commonly used to encompass both lifetime mortgages & house reversion schemes.
It might be excused for a member of the general public to get confused as to which time period is right, nevertheless a professional equity launch adviser ought to know the difference & explain accordingly!