Equity Release Or Lifetime Mortgage – That’s the Question

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

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

This article will try to allay misconceptions & confusion round the use of these 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 worth of an asset, less any loans or expenses made towards it.

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

However, the term equity release can apply to various methods of releasing equity. These might embody an additional advance on a conventional mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over fifty five’s.

So what is the distinction between equity release & a lifetime mortgage & how can they be differentiated?

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

Of these schemes a lifetime mortgage is the most common & is basically a loan secured on the house which releases tax free money for the applicant to spend as they wish.

The tax free cash might be released in the form of an revenue 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. Nevertheless, unlike a traditional mortgage there are not any month-to-month repayments to make.

This process continues in the course of the occupants life, until they die or move into long term 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 release is a Home Reversion scheme. In essence, you sell all or a part of your house to the scheme provider (reversion firm) in return for regular earnings 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 until dying or moving into long run care.

At this level, the property is then sold & the reversion firm will acquire its money. The quantity they obtain might 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 firm, they will then receive 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 might be, 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 therefore guarantee a share of the eventual sale proceeds to the beneficiaries & generally will probably be used for this reason.

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

This is due to the truth that the rolled-up interest compounds annually & will continue to do so as long as the occupier is resident. This could ultimately result in the balance surpassing the value of the property, which in effect would end in negative equity situation.

Nonetheless, all SHIP (Safe Home Earnings Plans) approved products embody a no negative equity guarantee, which signifies that should the balance of the mortgage be better 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 value of the property.

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

Due to this fact in summary, the term equity release is a generic term commonly used to encompass each lifetime mortgages & dwelling reversion schemes.

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