Equity launch & lifetime mortgage are the 2 most commonly used terms to describe the discharge of equity from a property – however which term is technically appropriate?
Expertise has shown that confusion arises when both phrases – equity launch & lifetime mortgage are utilized in the same sentence. Folks have been known to request an equity launch plan, however not a lifetime mortgage!
This article will attempt to allay misconceptions & confusion around using these mortgage terms.
The word ‘equity launch’ 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 costs made against it.
By releasing equity from your property, you might be freeing the spare amount of capital available within the property, to use for personal expenditure purposes.
However, the term equity release can apply to numerous strategies of releasing equity. These might embody an extra advance on a conventional mortgage, or, as discussed specifically in this article, a special type of mortgage for the over 55’s.
So what is the difference between equity release & 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 release 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 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 could be launched within the type of an income 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 in the course of 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 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 firm) in return for normal earnings or a tax free lump sum or both, and proceed to live in your home. You receive a lifetime tenancy within the property & often live there rent free till dying or moving into long run care.
At this point, the property is then sold & the reversion company will gather its money. The amount they receive 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 company, they will then obtain 60% of the eventual sale proceeds, whether or not this is decrease 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 probably realises their capital quicker. As a consequence, the reversion firm can subsequently offer more favourable terms.
These schemes due to this fact guarantee a proportion 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 guarantee as to how much equity, if anything, will be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds yearly & will continue to do so as long as the occupier is resident. This might finally result in the balance surpassing the worth of the property, which in impact would result in negative equity situation.
Nevertheless, all SHIP (Safe Home Earnings Plans) approved products embody a no negative equity assure, which implies that should the balance of the mortgage be better 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 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 could possibly be excused for a member of the general public to get confused as to which term is appropriate, nonetheless a qualified equity release adviser should know the distinction & clarify accordingly!