Equity Release Or Lifetime Mortgage – That is the Question

Equity release & lifetime mortgage are the two most commonly used terms to explain the discharge of equity from a property – however which time period is technically appropriate?

Expertise has shown that confusion arises when both phrases – equity launch & lifetime mortgage are used in the identical sentence. People have been known to request an equity launch plan, however not a lifetime mortgage!

This article will attempt to allay misconceptions & confusion round the use of these two mortgage terms.

The word ‚equity launch‘ is used as a generic time period identifying the withdrawal of capital from your property. ‚Equity‘ being the value of an asset, less any loans or fees made against it.

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

Nonetheless, the time period equity release can apply to numerous strategies of releasing equity. These could embrace a further 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 distinction between equity release & 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 launch for the over 55’s encompasses the 2 types of schemes available; lifetime mortgages & house 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 cash for the applicant to spend as they wish.

The tax free cash could be released in the type of an income 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 annually by the lender. Nevertheless, unlike a traditional mortgage there aren’t any monthly repayments to make.

This process continues throughout 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 a part of your private home to the scheme provider (reversion firm) in return for normal earnings or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy in the property & usually live there rent free till dying or moving into long run care.

At this point, the property is then sold & the reversion firm will accumulate its money. The amount they receive shall 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’ll then obtain 60% of the eventual sale proceeds, whether 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’re, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can subsequently provide more favourable terms.

These schemes subsequently assure a share of the eventual sale proceeds to the beneficiaries & generally will be used for this reason.

On the contrary, a roll-up lifetime mortgage has generally no such guarantee as to how a lot equity, if anything, shall be left for the beneficiaries.

This is due to the truth that the rolled-up curiosity compounds yearly & will proceed to take action so long as the occupier is resident. This might eventually consequence in the balance surpassing the value of the property, which in effect would result in negative equity situation.

Nonetheless, 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 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 never owe more than the value of the property.

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

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

It could possibly be excused for a member of the public to get confused as to which term is appropriate, however a certified equity release adviser should know the difference & clarify accordingly!