Equity Release Or Lifetime Mortgage – That’s the Question

Equity launch & lifetime mortgage are the 2 most commonly used terms to describe the release of equity from a property – but which term is technically right?

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

This article will try 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 out of your property. ‚Equity‘ being the value of an asset, less any loans or costs made against it.

By releasing equity from your property, you might be freeing the spare amount of capital available in the property, to use for personal expenditure purposes.

Nevertheless, the term equity launch can apply to varied methods of releasing equity. These may include an extra advance on a traditional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over 55’s.

So what’s the difference between equity release & a lifetime mortgage & how can they be differentiated?

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

Of these 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 may be released in the type of an income or more commonly a capital lump sum.

With a lifetime mortgage, the original quantity borrowed is charged a fixed rate of interest which is then added annually by the lender. Nonetheless, unlike a traditional mortgage there are not any month-to-month repayments to make.

This process continues at some stage in 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 repay 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 home to the scheme provider (reversion firm) in return for normal income or a tax free lump sum or both, and continue to live in your home. You receive a lifetime tenancy in the property & often live there lease free till loss of life or moving into long run care.

At this level, the property is then sold & the reversion firm will accumulate its money. The amount they obtain will be a proportion 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 company, they will then obtain 60% of the eventual sale proceeds, whether this is decrease 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 might be, the shorter your life expectancy & thus the lender probably realises their capital quicker. As a consequence, the reversion firm can subsequently supply more favourable terms.

These schemes therefore assure a share of the eventual sale proceeds to the beneficiaries & generally might 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, shall be left for the beneficiaries.

This is because of the fact that the rolled-up interest compounds yearly & will proceed to do so as long as the occupier is resident. This could ultimately consequence in the balance surpassing the value of the property, which in impact would lead to negative equity situation.

However, all SHIP (Safe Home Income Plans) approved products embrace 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 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 cost to the borrower.

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

It may very well be excused for a member of the public to get confused as to which time period is correct, nonetheless a professional equity launch adviser should know the difference & clarify accordingly!