Equity release & lifetime mortgage are the 2 most commonly used phrases to describe the discharge of equity from a property – however which term is technically correct?
Expertise has shown that confusion arises when both phrases – equity release & lifetime mortgage are used in the identical sentence. People have been known to request an equity launch plan, however not a lifetime mortgage!
This article will try to allay misconceptions & confusion round the use of these mortgage terms.
The word ‘equity launch’ is used as a generic term figuring out the withdrawal of capital out of your property. ‘Equity’ being the worth of an asset, less any loans or prices made against it.
By releasing equity from your property, you might be releasing the spare amount of capital available in the property, to use for personal expenditure purposes.
Nevertheless, the time period equity release can apply to numerous strategies of releasing equity. These may embrace an additional advance on a traditional mortgage, or, as discussed specifically in this article, a special type of mortgage for the over 55’s.
So what is the difference 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 & determine the product variations. Equity release 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 typical & 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 might be launched within the type 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 yearly by the lender. Nevertheless, unlike a standard mortgage there aren’t any 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 pay off 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 regular revenue or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy within the property & normally live there rent free till demise or moving into long term care.
At this level, the property is then sold & the reversion firm will gather its money. The amount they receive will 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 firm, they may then receive 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 might be, 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 due to this fact guarantee a share of the eventual sale proceeds to the beneficiaries & generally will likely be used for this reason.
Quite the opposite, 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 continue to do so so long as the occupier is resident. This may finally result within the balance surpassing the value of the property, which in effect would end in negative equity situation.
However, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity guarantee, 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 guarantee 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.
Due to this fact in abstract, the time period equity launch is a generic term commonly used to encompass each lifetime mortgages & dwelling reversion schemes.
It could be excused for a member of the public to get confused as to which time period is appropriate, nevertheless a qualified equity launch adviser should know the distinction & clarify accordingly!
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