Equity Release Or Lifetime Mortgage – That’s the Question

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

Expertise has shown that confusion arises when each terms – equity launch & lifetime mortgage are utilized in the same sentence. Folks have been known to request an equity release plan, but 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 identifying the withdrawal of capital out of your property. ‚Equity‘ being the worth of an asset, less any loans or fees made against it.

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

Nonetheless, the term equity launch can apply to varied strategies 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 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 release for the over 55’s encompasses the two types of schemes available; lifetime mortgages & dwelling 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 money for the applicant to spend as they wish.

The tax free money will be launched in the type 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. However, unlike a traditional mortgage there are not any monthly repayments to make.

This process continues during 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 house to the scheme provider (reversion company) in return for regular revenue or a tax free lump sum or each, and proceed to live in your home. You receive a lifetime tenancy in the property & normally live there lease free until death or moving into long run care.

At this level, the property is then sold & the reversion company will acquire its money. The quantity they obtain will likely 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 may 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 are, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can due to this fact provide more favourable terms.

These schemes therefore assure a percentage of the eventual sale proceeds to the beneficiaries & generally shall 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, will likely 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 might ultimately consequence within the balance surpassing the worth of the property, which in impact would end in negative equity situation.

Nonetheless, 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 larger than the eventual sale of the property, then the lender will only ask for the worth of the property. This guarantee ensures the beneficiaries by no means owe more than the value of the property.

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

Subsequently in abstract, the term equity release is a generic term commonly used to encompass each lifetime mortgages & house reversion schemes.

It might be excused for a member of the public to get confused as to which time period is appropriate, nonetheless a certified equity launch adviser should know the distinction & explain accordingly!