Equity launch & lifetime mortgage are the 2 most commonly used phrases to describe the release of equity from a property – however which term is technically correct?
Expertise has shown that confusion arises when each phrases – equity release & lifetime mortgage are used 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 round 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 worth of an asset, less any loans or costs made against it.
By releasing equity out of your property, you’re freeing the spare quantity of capital available in the property, to use for personal expenditure purposes.
Nonetheless, the term equity release can apply to numerous strategies of releasing equity. These might include an extra advance on a standard mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over fifty five’s.
So what’s the difference between equity release & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity release come into play & determine the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & house reversion schemes.
Of those two schemes a lifetime mortgage is the commonest & is basically a loan secured on the house which releases tax free money for the applicant to spend as they wish.
The tax free money can be released in the form of an income or more commonly a capital lump sum.
With a lifetime mortgage, the original amount borrowed is charged a fixed rate of interest which is then added annually by the lender. Nonetheless, unlike a traditional mortgage there are no month-to-month repayments to make.
This process continues for the duration of 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 house to the scheme provider (reversion firm) in return for normal revenue or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy in the property & normally live there rent free until loss of life or moving into long term care.
At this point, the property is then sold & the reversion company will acquire its money. The amount they obtain will likely be a share 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 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 potentially realises their capital quicker. As a consequence, the reversion company can due to this fact supply more favourable terms.
These schemes due to this fact guarantee a proportion of the eventual sale proceeds to the beneficiaries & generally shall be used for this reason.
On the contrary, a roll-up lifetime mortgage has generally no such assure as to how a lot equity, if anything, will be left for the beneficiaries.
This is due to the fact that the rolled-up interest compounds annually & will continue to do so as long as the occupier is resident. This might eventually result in the balance surpassing the value of the property, which in impact would end in negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity guarantee, which signifies that ought to the balance of the mortgage be larger than the eventual sale of the property, then the lender will only ask for the value of the property. This guarantee ensures the beneficiaries never owe more than the worth of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Subsequently in summary, the term equity release is a generic term commonly used to encompass both lifetime mortgages & residence reversion schemes.
It might be excused for a member of the general public to get confused as to which time period is correct, nevertheless a qualified equity release adviser should know the distinction & clarify accordingly!