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Equity Release

Equity release mortgages have become increasingly popular in the last couple of years, with a number of high street lenders having now entered the market to unlock the estimated £800 billion of equity currently in the UK. Lifetime mortgages have been available for approaching 40 years

However, their popularity is due to people's desire to boost their income at a time of lacklustre equity markets and low interest rates, following a period of substantial property price increases.

There are two types of equity release schemes the following is a guide:

Equity release mortgage plan

The lender will only consider this if you have little or no outstanding mortgage on the property. Any outstanding mortgage payments must be paid off by using part of the equity released or by other means if desired. With this plan, an agreed percentage of the current value of your home will be released, and this loan will accrue interest at a rate in line with current interest rates.

The equity release plan is offered as a tax free fixed loan. For example if you borrow £40,000 against the value of your property, you must pay back the £40,000 plus any interest and other costs that have accrued, exactly as you would with a traditional mortgage or personal loan. This plan does account for the life expectancy of the home owners, and does not give them the added benefit and peace of mind of an on going income throughout their lifetime.

This plan also means that the next of kin will have there inheritance reduced by the loan and interest amount, which can largely be dependant on the life expectancy of the home owner.

Equity release home reversion plan

A home reversion plan allows you to release a percentage of the value of your home. The interest accrued in this plan is in line with the appreciation (or rare instances, depreciation) of the value of your home. For example if you choose to release 20% of the value of your home, a lender will receive 20% of the value of the property at the time of sale. A surveyor working with the lender will value your home.

With this plan your age is a primary factor in determining the allowable amount you may borrow based on a reduced value of your home .Other factors such as your health, gender and the estimated future value of your home will be taken into consideration.

The loan must be paid off on the sale of the house this may be unsuitable for anyone wishing to leave a complete property rather than a monetary value of the property as an inheritance for their next of kin. Unlike the mortgage plan, the reversion plan gives you the opportunity to release up to 100% of the surveyed value of your home, as there are no interest rates applied to the loan. In both instances age is the primary factor in determining the percentage of the value of your home that can be released. A person of an older age can release a higher percentage than a person who is younger as they are not expected to live as long. There is no maximum age limit for equity release although applications are not usually granted for anyone under the age of sixty.

Summary of the advantages and disadvantages

Advantage of the equity release mortgage plan

Disadvantages of the Equity release mortgage plan

Advantages of the Equity release home reversion plan

Disadvantages of the Equity release home reversion plan

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