Equity Release Or Lifetime Mortgage - That is the Question

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 release & lifetime mortgage are used in the same sentence. People have been known to request an equity release plan, but not a lifetime mortgage!

This article will attempt to allay misconceptions & confusion around the use of 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 value of an asset, less any loans or charges made against it.

By releasing equity from your property, you are freeing the spare amount of capital available in the property, to use for personal expenditure purposes.

However, the term equity release can apply to various methods of releasing equity. These could include a further 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 55's encompasses the two types of schemes available; lifetime mortgages & home reversion schemes.

Of these two schemes a lifetime mortgage is the most common & 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 can be released in the form of an income 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 annually by the lender. However, unlike a conventional mortgage there are no monthly repayments to make.

This process continues for the duration 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 part of your home to the scheme provider (reversion company) in return for regular income or a tax free lump sum or both, and continue 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 company will collect its money. The amount they receive will be a percentage 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 receive 60% of the eventual sale proceeds, whether this is lower 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 potentially realises their capital quicker. As a consequence, the reversion company can therefore offer more favourable terms.

These schemes therefore guarantee a percentage of the eventual sale proceeds to the beneficiaries & generally will 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 due to the fact that the rolled-up interest compounds annually & will continue to do so as long as the occupier is resident. This could eventually result in the balance surpassing the value of the property, which in effect would result in negative equity situation.

However, all SHIP (Safe Home Income Plans) approved products include a no negative equity guarantee, which means that should the balance of the mortgage be greater than the eventual sale of the property, then the lender will only ask for the value 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 term equity release is a generic term commonly used to encompass both lifetime mortgages & home reversion schemes.



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