Equity Release Or Lifetime Mortgage – That is the Question

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

Experience has shown that confusion arises when each terms – equity launch & lifetime mortgage are used in the identical sentence. Folks have been known to request an equity launch plan, however not a lifetime mortgage!

This article will try to allay misconceptions & confusion round using these two mortgage terms.

The word ‚equity release‘ is used as a generic term figuring out the withdrawal of capital from your property. ‚Equity‘ being the worth of an asset, less any loans or prices made in opposition to it.

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

Nonetheless, the time period equity release can apply to various methods of releasing equity. These may include an additional advance on a standard mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over 55’s.

So what’s the distinction 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 fifty five’s encompasses the two types of schemes available; lifetime mortgages & residence reversion schemes.

Of these schemes a lifetime mortgage is the most common & 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 will be released within the form of an income 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. Nonetheless, unlike a standard mortgage there are no monthly repayments to make.

This process continues all through 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 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 part of your private home to the scheme provider (reversion company) in return for normal revenue 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 hire free till demise or moving into long run care.

At this point, the property is then sold & the reversion company will accumulate its money. The quantity they obtain will probably 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’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 are, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion company can due to this fact supply more favourable terms.

These schemes therefore assure a proportion of the eventual sale proceeds to the beneficiaries & generally can be used for this reason.

Quite the opposite, a roll-up lifetime mortgage has generally no such assure as to how a lot equity, if anything, can be left for the beneficiaries.

This is due to the fact that the rolled-up interest compounds yearly & will continue to do so as long as the occupier is resident. This may finally outcome in the balance surpassing the value of the property, which in effect would result in negative equity situation.

However, all SHIP (Safe Home Revenue Plans) approved products embody a no negative equity guarantee, which means that ought to the balance of the mortgage be larger than the eventual sale of the property, then the lender will only ask for the value of the property. This guarantee ensures the beneficiaries never owe more than the value of the property.

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

Therefore in abstract, the time period equity launch is a generic time period commonly used to encompass each lifetime mortgages & house reversion schemes.

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