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Equity Release Or Lifetime Mortgage - That's the Question
Equity release & lifetime mortgage are the two most commonly used terms to explain the discharge of equity from a property - but which term is technically right?
Experience has shown that confusion arises when each terms - equity release & lifetime mortgage are utilized in the same sentence. People have been known to request an equity release plan, however not a lifetime mortgage!
This article will try and allay misconceptions & confusion round the usage of these two mortgage terms.
The word 'equity launch' 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 against it.
By releasing equity out of your property, you're releasing the spare amount of capital available within the property, to make use of for personal expenditure purposes.
However, the term equity release can apply to numerous methods of releasing equity. These may include an extra advance on a standard mortgage, or, as discussed 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 the place the additional definitions of equity launch come into play & establish 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 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 might be released in the type of an earnings or more commonly a capital lump sum.
With a lifetime mortgage, the original amount borrowed is charged a fixed rate of interest which is then added yearly by the lender. However, unlike a traditional mortgage there aren't any monthly repayments to make.
This process continues all through 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 release is a Home Reversion scheme. In essence, you sell all or a part of your property 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 receive a lifetime tenancy in the property & usually live there lease free till demise or moving into long run care.
At this point, the property is then sold & the reversion firm will accumulate its money. The amount they receive might be a share 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 company, they'll 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 are, the shorter your life expectancy & thus the lender doubtlessly realises their capital quicker. As a consequence, the reversion firm can subsequently offer more favourable terms.
These schemes therefore assure a percentage of the eventual sale proceeds to the beneficiaries & generally will probably 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, will probably be left for the beneficiaries.
This is because of the truth that the rolled-up interest compounds annually & will proceed to do so so 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.
However, all SHIP (Safe Home Income Plans) approved products embrace a no negative equity guarantee, which implies 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 guarantee ensures the beneficiaries never owe more than the value of the property.
The no negative equity guarantee is provided at no additional cost to the borrower.
Therefore in summary, the time period equity launch is a generic term commonly used to encompass each lifetime mortgages & home reversion schemes.
It may very well be excused for a member of the general public to get confused as to which time period is right, however a professional equity launch adviser should know the distinction & explain accordingly!
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