Equity release & lifetime mortgage are the 2 most commonly used terms to describe the discharge of equity from a property – however which time period is technically correct?
Expertise has shown that confusion arises when both terms – equity launch & lifetime mortgage are utilized in the identical sentence. People have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion around using these mortgage terms.
The word ‘equity launch’ is used as a generic time period identifying the withdrawal of capital out of your property. ‘Equity’ being the worth of an asset, less any loans or costs made towards it.
By releasing equity from your property, you are releasing the spare quantity of capital available in the property, to use for personal expenditure purposes.
However, the time period equity release can apply to various strategies of releasing equity. These may embody an extra advance on a conventional 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 launch & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity release come into play & identify the product variations. Equity launch for the over 55’s encompasses the 2 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 cash will be launched in the type of an earnings 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 yearly by the lender. Nonetheless, unlike a conventional mortgage there are no monthly repayments to make.
This process continues during 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 launch is a Home Reversion scheme. In essence, you sell all or part of your home to the scheme provider (reversion firm) in return for regular revenue or a tax free lump sum or both, and continue to live in your home. You obtain a lifetime tenancy within the property & often live there rent free till demise or moving into long run care.
At this point, the property is then sold & the reversion firm will accumulate its money. The amount they obtain will be a percentage 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 company, they will 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’re, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion company can subsequently provide more favourable terms.
These schemes therefore assure a share of the eventual sale proceeds to the beneficiaries & generally will probably 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 likely be left for the beneficiaries.
This is due to the fact that the rolled-up curiosity compounds annually & will proceed to do so so long as the occupier is resident. This could ultimately result in the balance surpassing the worth of the property, which in effect would lead to negative equity situation.
Nevertheless, all SHIP (Safe Home Income Plans) approved products embrace a no negative equity guarantee, which signifies that should the balance of the mortgage be higher than the eventual sale of the property, then the lender will only ask for the worth of the property. This assure ensures the beneficiaries by no means owe more than the worth of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Due to this fact in abstract, the term equity release is a generic time period commonly used to encompass each lifetime mortgages & residence reversion schemes.
It might be excused for a member of the public to get confused as to which time period is right, however a qualified equity release adviser should know the difference & explain accordingly!
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