Equity Release Or Lifetime Mortgage – That is the Question

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

Expertise has shown that confusion arises when both terms – equity launch & lifetime mortgage are used in the same 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 usage of these 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 value of an asset, less any loans or prices made in opposition to it.

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

However, the term equity release can apply to numerous methods of releasing equity. These might include an additional advance on a conventional mortgage, or, as mentioned specifically in this article, a special 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 & establish the product variations. Equity launch for the over fifty five’s encompasses the 2 types of schemes available; lifetime mortgages & house reversion schemes.

Of these schemes a lifetime mortgage is the commonest & is basically a loan secured on the home which releases tax free cash for the applicant to spend as they wish.

The tax free money will be released in the type of an revenue or more commonly a capital lump sum.

With a lifetime mortgage, the original quantity borrowed is charged a fixed rate of interest which is then added yearly by the lender. However, unlike a conventional mortgage there are not any monthly repayments to make.

This process continues at some point of 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 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 property to the scheme provider (reversion company) in return for normal income or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy within the property & usually live there rent free until death or moving into long term care.

At this level, the property is then sold & the reversion firm will accumulate its money. The amount they obtain will probably 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 firm, they will then receive 60% of the eventual sale proceeds, whether or not 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 company can subsequently supply more favourable terms.

These schemes therefore assure a percentage 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 guarantee as to how a lot equity, if anything, shall be left for the beneficiaries.

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

However, all SHIP (Safe Home Earnings Plans) approved products include a no negative equity assure, 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 assure ensures the beneficiaries by no means owe more than the value of the property.

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

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

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

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