Equity launch & lifetime mortgage are the two most commonly used phrases to describe the discharge of equity from a property – but which term is technically correct?
Experience has shown that confusion arises when each phrases – equity launch & lifetime mortgage are utilized in the same 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 the use of these two 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 costs made in opposition to 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.
Nevertheless, the time period equity launch can apply to various methods of releasing equity. These may embody an extra advance on a traditional mortgage, or, as discussed specifically in this article, a special 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 launch come into play & determine the product variations. Equity release for the over fifty five’s encompasses the 2 types of schemes available; lifetime mortgages & house reversion schemes.
Of these two schemes a lifetime mortgage is the commonest & is basically a loan secured on the home which releases tax free cash for the applicant to spend as they wish.
The tax free cash could be released in the form of an revenue or more commonly a capital lump sum.
With a lifetime mortgage, the unique amount borrowed is charged a fixed rate of interest which is then added yearly by the lender. Nevertheless, unlike a traditional mortgage there are not any monthly repayments to make.
This process continues at some stage in the occupants life, until they die or move into long run care. At that time 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 a part of your property to the scheme provider (reversion company) in return for regular income or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy within the property & usually live there rent free until demise or moving into long term care.
At this point, the property is then sold & the reversion company will gather its money. The quantity they receive will probably 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 company, they are going to then obtain 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 probably realises their capital quicker. As a consequence, the reversion firm can therefore provide more favourable terms.
These schemes due to this fact assure a proportion of the eventual sale proceeds to the beneficiaries & generally might 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 probably be left for the beneficiaries.
This is due to the truth that the rolled-up interest compounds annually & will proceed to do so as long as the occupier is resident. This may eventually outcome within the balance surpassing the worth of the property, which in effect would end in negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products embrace a no negative equity guarantee, which means 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 assure is provided at no additional price to the borrower.
Due to this fact in abstract, the time period equity release is a generic time period commonly used to encompass both lifetime mortgages & house reversion schemes.
It could be excused for a member of the general public to get confused as to which time period is correct, however a qualified equity launch adviser should know the difference & explain accordingly!