Equity Release Or Lifetime Mortgage – That is the Query

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

Experience has shown that confusion arises when each terms – equity launch & lifetime mortgage are utilized in the same 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 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 costs made towards it.

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

However, the time period equity launch can apply to numerous methods of releasing equity. These could embody a further advance on a standard mortgage, or, as discussed specifically in this article, a special 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 where the additional definitions of equity release come into play & identify the product variations. Equity launch for the over 55’s encompasses the two types of schemes available; lifetime mortgages & house 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 cash 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 annually by the lender. However, unlike a standard mortgage there are no month-to-month repayments to make.

This process continues during 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 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 obtain a lifetime tenancy within the property & often live there hire free till dying or moving into long term care.

At this level, the property is then sold & the reversion firm will accumulate its money. The quantity they obtain shall be a share 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 firm, they may then obtain 60% of the eventual sale proceeds, whether 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’re, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can therefore supply more favourable terms.

These schemes subsequently guarantee a share 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 because of the fact that the rolled-up curiosity compounds yearly & will continue to take action as long as the occupier is resident. This may eventually consequence within the balance surpassing the worth 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 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 by no means owe more than the worth of the property.

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

Therefore in abstract, the term equity launch is a generic term commonly used to encompass both 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 correct, nonetheless a professional equity release adviser should know the distinction & explain accordingly!