Equity Release Or Lifetime Mortgage – That is the Question

Equity release & lifetime mortgage are the two 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 release & lifetime mortgage are used in the identical sentence. Folks have been known to request an equity release plan, however not a lifetime mortgage!

This article will try to allay misconceptions & confusion round using these 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 costs made in opposition to it.

By releasing equity out of your property, you are releasing the spare quantity of capital available within the property, to make use of for personal expenditure purposes.

Nevertheless, the time period equity launch can apply to varied strategies of releasing equity. These could embody a further advance on a conventional mortgage, or, as mentioned specifically in this article, a particular type of mortgage for the over 55’s.

So what’s the difference between equity launch & a lifetime mortgage & how can they be differentiated?

Well, this is where the additional definitions of equity launch come into play & identify the product variations. Equity launch for the over fifty five’s encompasses the 2 types of schemes available; lifetime mortgages & home reversion schemes.

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

The tax free money could be launched within the type of an earnings 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 standard mortgage there aren’t any monthly repayments to make.

This process continues during the occupants life, till 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 part of your property to the scheme provider (reversion company) in return for normal income or a tax free lump sum or each, and proceed to live in your home. You obtain a lifetime tenancy within the property & normally live there lease free till loss of life or moving into long term care.

At this point, the property is then sold & the reversion firm will collect its money. The quantity they obtain can 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 decrease or higher than the original 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 provide more favourable terms.

These schemes due to this fact guarantee a proportion of the eventual sale proceeds to the beneficiaries & generally will likely 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, will be left for the beneficiaries.

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

Nonetheless, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity assure, which signifies that ought to 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 assure 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.

Due to this fact in abstract, the time period equity launch is a generic term commonly used to encompass both lifetime mortgages & residence reversion schemes.

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