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 - but which term is technically correct?
Experience has shown that confusion arises when both terms - equity launch & lifetime mortgage are used in the same sentence. Individuals have been known to request an equity launch plan, but not a lifetime mortgage!
This article will try to allay misconceptions & confusion around the usage of these two 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 expenses made towards it.
By releasing equity from your property, you are liberating the spare amount of capital available in the property, to make use of for personal expenditure purposes.
Nevertheless, the term equity release can apply to various strategies of releasing equity. These could embrace an additional advance on a standard mortgage, or, as discussed specifically in this article, a particular 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 two types of schemes available; lifetime mortgages & house reversion schemes.
Of these 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 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 annually by the lender. However, unlike a standard mortgage there are no monthly repayments to make.
This process continues in the course of the occupants life, until 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 release is a Home Reversion scheme. In essence, you sell all or a part of your private home to the scheme provider (reversion company) in return for regular earnings or a tax free lump sum or each, and proceed to live in your home. You receive a lifetime tenancy in the property & usually live there rent free until death or moving into long term care.
At this point, the property is then sold & the reversion firm will acquire its money. The amount they obtain can be a percentage of the sale proceeds, dependent upon how a lot 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 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 might be, the shorter your life expectancy & thus the lender potentially realises their capital quicker. As a consequence, the reversion company can subsequently supply more favourable terms.
These schemes due to this fact assure a percentage 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 guarantee as to how much equity, if anything, shall be left for the beneficiaries.
This is because of the fact that the rolled-up interest compounds yearly & will continue to do so as long as the occupier is resident. This may finally result within the balance surpassing the worth of the property, which in effect would result in negative equity situation.
Nonetheless, all SHIP (Safe Home Revenue Plans) approved products include a no negative equity assure, which implies that should the balance of the mortgage be larger than the eventual sale of the property, then the lender will only ask for the value of the property. This guarantee ensures the beneficiaries by no means owe more than the worth of the property.
The no negative equity assure is provided at no additional value to the borrower.
Due to this fact in summary, the time period equity release is a generic time period commonly used to encompass each lifetime mortgages & home reversion schemes.
It might be excused for a member of the public to get confused as to which term is correct, however a certified equity release adviser should know the distinction & clarify accordingly!
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