Equity Release Or Lifetime Mortgage – That is the Question

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

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

This article will try and allay misconceptions & confusion around using these two mortgage terms.

The word ‚equity release‘ is used as a generic term identifying the withdrawal of capital from your property. ‚Equity‘ being the worth of an asset, less any loans or charges made in opposition to it.

By releasing equity from your property, you’re liberating the spare quantity of capital available within the property, to make use of for personal expenditure purposes.

Nonetheless, the term equity launch can apply to numerous strategies of releasing equity. These might embrace a further advance on a standard mortgage, or, as discussed specifically in this article, a particular type of mortgage for the over fifty five’s.

So what’s the difference 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 55’s encompasses the 2 types of schemes available; lifetime mortgages & residence 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 cash for the applicant to spend as they wish.

The tax free cash will be launched within the form 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 annually by the lender. Nonetheless, unlike a conventional mortgage there are no monthly 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 regular revenue or a tax free lump sum or each, and continue to live in your home. You obtain a lifetime tenancy in the property & normally live there hire free until loss of life or moving into long term care.

At this level, the property is then sold & the reversion firm will collect its money. The quantity they receive shall be a share 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 are going to then obtain 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 might be, the shorter your life expectancy & thus the lender probably realises their capital quicker. As a consequence, the reversion firm can therefore provide more favourable terms.

These schemes subsequently assure a share of the eventual sale proceeds to the beneficiaries & generally will be used for this reason.

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

This is because of the fact that the rolled-up curiosity compounds yearly & will proceed to take action as long as the occupier is resident. This could eventually end result within the balance surpassing the worth of the property, which in effect would lead to negative equity situation.

However, all SHIP (Safe Home Income Plans) approved products embody a no negative equity assure, which signifies that should the balance of the mortgage be higher 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 worth of the property.

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

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

It could be excused for a member of the general public to get confused as to which term is right, nonetheless a certified equity release adviser should know the distinction & clarify accordingly!