Equity release & lifetime mortgage are the 2 most commonly used terms to explain the discharge of equity from a property – however which term is technically appropriate?
Experience 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 release plan, however 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 figuring out the withdrawal of capital from your property. ‘Equity’ being the value of an asset, less any loans or expenses made towards it.
By releasing equity out of your property, you are releasing the spare quantity of capital available within the property, to use for personal expenditure purposes.
However, the term equity launch can apply to varied strategies of releasing equity. These could include an additional advance on a conventional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over 55’s.
So what is the distinction between equity launch & a lifetime mortgage & how can they be differentiated?
Well, this is where the additional definitions of equity launch come into play & establish the product variations. Equity release for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & dwelling reversion schemes.
Of these two 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 can be released in the form of an income or more commonly a capital lump sum.
With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of curiosity which is then added yearly by the lender. Nonetheless, unlike a conventional mortgage there are not any month-to-month repayments to make.
This process continues throughout 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 release is a Home Reversion scheme. In essence, you sell all or part of your property to the scheme provider (reversion company) in return for regular income or a tax free lump sum or each, and continue to live in your home. You receive a lifetime tenancy in the property & usually live there lease free until loss of life or moving into long run care.
At this point, the property is then sold & the reversion firm will collect its money. The quantity they receive shall be a proportion 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 are going to then receive 60% of the eventual sale proceeds, whether or not 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 are, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can due to this fact supply more favourable terms.
These schemes due to this fact assure a share of the eventual sale proceeds to the beneficiaries & generally will be used for this reason.
Quite the opposite, a roll-up lifetime mortgage has generally no such guarantee as to how much equity, if anything, will be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds yearly & will proceed to do so so long as the occupier is resident. This may finally result in the balance surpassing the value of the property, which in effect would lead to negative equity situation.
However, all SHIP (Safe Home Income Plans) approved products include a no negative equity assure, which means that ought to 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 assure 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 time period equity release is a generic term commonly used to encompass both lifetime mortgages & home reversion schemes.
It might be excused for a member of the public to get confused as to which time period is right, however a professional equity launch adviser ought to know the distinction & clarify accordingly!
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