Equity release & lifetime mortgage are the two most commonly used phrases to describe the release of equity from a property – but which term is technically right?
Expertise has shown that confusion arises when both terms – equity release & lifetime mortgage are utilized in the same sentence. People have been known to request an equity launch plan, however not a lifetime mortgage!
This article will try to allay misconceptions & confusion around the use of these mortgage terms.
The word ‘equity release’ 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 expenses made against it.
By releasing equity from your property, you might be liberating the spare amount 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 embody an extra advance on a traditional mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over fifty five’s.
So what’s the distinction between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity launch come into play & determine the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & dwelling reversion schemes.
Of these schemes a lifetime mortgage is the commonest & 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 may be released in the type of an income or more commonly a capital lump sum.
With a lifetime mortgage, the unique amount borrowed is charged a fixed rate of curiosity which is then added annually by the lender. However, unlike a standard mortgage there are no monthly repayments to make.
This process continues at some point of the occupants life, till they die or move into long term 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 a part of your property to the scheme provider (reversion company) in return for regular income or a tax free lump sum or each, and proceed to live in your home. You receive a lifetime tenancy within the property & often live there hire free until death or moving into long term care.
At this level, the property is then sold & the reversion company will collect its money. The amount they receive can be a percentage 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 original 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 firm can due to this fact provide more favourable terms.
These schemes subsequently assure a share of the eventual sale proceeds to the beneficiaries & generally might be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such assure as to how much equity, if anything, will probably be left for the beneficiaries.
This is because of the fact that the rolled-up interest compounds annually & will proceed to take action so long as the occupier is resident. This might eventually result within the balance surpassing the value of the property, which in effect would lead to negative equity situation.
However, all SHIP (Safe Home Revenue Plans) approved products embrace 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 value of the property. This guarantee 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 abstract, the term equity release is a generic time period commonly used to encompass each lifetime mortgages & residence reversion schemes.
It may very well be excused for a member of the general public to get confused as to which term is right, nonetheless a qualified equity launch adviser should know the distinction & clarify accordingly!
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