Equity launch & lifetime mortgage are the two most commonly used terms to explain the discharge of equity from a property – but which term is technically appropriate?
Experience has shown that confusion arises when each phrases – equity release & lifetime mortgage are utilized in the same sentence. Individuals have been known to request an equity release plan, however not a lifetime mortgage!
This article will try and allay misconceptions & confusion around the usage of these two mortgage terms.
The word ‘equity release’ is used as a generic term figuring out the withdrawal of capital from your property. ‘Equity’ being the value of an asset, less any loans or prices made towards it.
By releasing equity out of your property, you’re liberating the spare amount of capital available within the property, to use for personal expenditure purposes.
Nonetheless, the time period equity launch can apply to varied methods of releasing equity. These might embody a further advance on a standard 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 the place the additional definitions of equity release come into play & identify the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & home reversion schemes.
Of these schemes a lifetime mortgage is the most typical & is basically a loan secured on the house which releases tax free cash for the applicant to spend as they wish.
The tax free money will be launched within the form of an earnings 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. Nevertheless, unlike a conventional mortgage there aren’t any month-to-month repayments to make.
This process continues all through 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 release is a Home Reversion scheme. In essence, you sell all or part of your private home to the scheme provider (reversion company) in return for normal earnings or a tax free lump sum or both, and continue to live in your home. You obtain a lifetime tenancy within the property & normally live there hire free till demise or moving into long run care.
At this point, the property is then sold & the reversion company will accumulate its money. The amount 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 will then obtain 60% of the eventual sale proceeds, whether or not 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 due to this fact provide more favourable terms.
These schemes therefore guarantee a share 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 much equity, if anything, shall be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds yearly & will continue to take action so long as the occupier is resident. This might finally result within the balance surpassing the worth of the property, which in impact would result in negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products embrace a no negative equity assure, which means that should the balance of the mortgage be greater 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 price to the borrower.
Due to this fact in summary, the time period equity launch is a generic time period commonly used to encompass each lifetime mortgages & residence reversion schemes.
It might be excused for a member of the general public to get confused as to which term is correct, nonetheless a certified equity launch adviser ought to know the difference & explain accordingly!