Equity Release Or Lifetime Mortgage – That is the Query

Equity launch & lifetime mortgage are the two most commonly used phrases to describe the release of equity from a property – however which term is technically right?

Experience 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, but not a lifetime mortgage!

This article will try to allay misconceptions & confusion around the usage of these mortgage terms.

The word ‚equity release‘ 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 expenses made in opposition to it.

By releasing equity out of your property, you’re releasing the spare amount of capital available in the property, to make use of for personal expenditure purposes.

Nevertheless, the term equity release can apply to numerous strategies of releasing equity. These might include a further advance on a standard 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 launch & a lifetime mortgage & how can they be differentiated?

Well, this is the place the additional definitions of equity release come into play & establish the product variations. Equity launch for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & house reversion schemes.

Of those schemes a lifetime mortgage is the commonest & is basically a loan secured on the home 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 earnings or more commonly a capital lump sum.

With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of interest which is then added yearly by the lender. Nevertheless, unlike a conventional mortgage there are no 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 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 own home to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy within the property & usually live there rent free till death or moving into long run care.

At this point, the property is then sold & the reversion firm will collect its money. The amount they receive will 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’ll then obtain 60% of the eventual sale proceeds, whether or not this is lower 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 subsequently supply more favourable terms.

These schemes subsequently guarantee a proportion 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 much equity, if anything, will likely be left for the beneficiaries.

This is because of the truth that the rolled-up interest compounds annually & will continue to do so so long as the occupier is resident. This might finally consequence in the balance surpassing the value of the property, which in impact would end in negative equity situation.

Nevertheless, all SHIP (Safe Home Revenue Plans) approved products include a no negative equity guarantee, which signifies that ought to the balance of the mortgage be higher 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 worth of the property.

The no negative equity guarantee is provided at no additional value to the borrower.

Therefore in summary, the time period equity launch is a generic term commonly used to encompass both lifetime mortgages & home reversion schemes.

It could be excused for a member of the public to get confused as to which term is right, nonetheless a professional equity launch adviser should know the distinction & explain accordingly!