Equity Release Or Lifetime Mortgage – That is the Query

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

Experience has shown that confusion arises when both terms – equity launch & lifetime mortgage are used in the identical 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 term identifying the withdrawal of capital from your property. ‚Equity‘ being the value of an asset, less any loans or prices made in opposition to it.

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

Nonetheless, the term equity launch can apply to various methods of releasing equity. These could include a further advance on a conventional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over fifty five’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 & residence reversion schemes.

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

With a lifetime mortgage, the unique quantity borrowed is charged a fixed rate of curiosity which is then added yearly by the lender. Nevertheless, unlike a standard mortgage there are no month-to-month repayments to make.

This process continues throughout the occupants life, until 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 part of your own home to the scheme provider (reversion firm) in return for regular earnings or a tax free lump sum or both, and proceed to live in your home. You obtain a lifetime tenancy in the property & usually live there lease free till demise or moving into long term care.

At this level, the property is then sold & the reversion company will acquire its money. The quantity they receive shall 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’ll then obtain 60% of the eventual sale proceeds, whether or not 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 doubtlessly realises their capital quicker. As a consequence, the reversion firm can therefore provide more favourable terms.

These schemes due to this fact guarantee a percentage 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 guarantee as to how a lot equity, if anything, will be left for the beneficiaries.

This is due to the truth that the rolled-up curiosity compounds annually & will continue to take action so long as the occupier is resident. This may ultimately result in the balance surpassing the value of the property, which in impact would lead to negative equity situation.

Nonetheless, all SHIP (Safe Home Income Plans) approved products include a no negative equity guarantee, which signifies that should 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 guarantee ensures the beneficiaries never owe more than the value of the property.

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

Therefore in abstract, the time period 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 difference & explain accordingly!