Equity release or downsizing: Which one is right for me?

If you’re asset-rich but cash poor in retirement, it may be worth using the value in your home to support your later life goals.

We delve deeper into which might be right for you: equity release or downsizing?

Why might you consider downsizing or releasing equity?

Managing your finances in retirement isn’t always easy.

Even after prudent planning during your working years, you may find yourself needing or wanting some extra cash at some point

You might be concerned that maintaining current income levels will result in your pension pot being drained too soon. For others, accessing cash will be about want rather than need.

You may wish to support the financial goals of younger generations while you’re still alive, such as funding education costs or saving for a house deposit.

If you’re in any of these situations and own your home, you have options. Either downsize to a cheaper property and pocket the difference or stay in your current home and unlock some equity.

Which one is right for you will depend on your personal preference and circumstances.

Opting for either is not a decision to be taken lightly – it will affect your and your loved one’s lives.

To help you safely navigate the decision-making process, here we outline the benefits and drawbacks of both equity release and downsizing.

1. Equity release

Available to anyone aged 55 and over, equity release is the process of unlocking value from your home without having to move.

While equity release has been around for some time, its popularity has taken off in recent years.

Equity release lending hit £2.6 billion in 2023, according to the Equity Release Council, down from a record-breaking £6.2 billion in 2022. 

If you decide equity release is the right approach for you, you can choose either a lifetime mortgage or a home reversion plan.

As the former is the most popular option, we’ll focus on that here.

A lifetime mortgage is when you borrow money against the value of your home.

The sum you receive is tax-free, and you aren’t required to make repayments, though you can if you want to. The loan is repaid once you die or move into a care home.

During the term, you can make interest and capital repayments if you choose.

Benefits

• The main benefit is it allows you to stay in your current home. It means you can avoid moving to a different property or relocating to a cheaper area away from friends and loved ones. If you’ve lived in your current home for many years, you may be part of a close-knit local community.
• The money you receive from the lender is tax-free, and there are no restrictions on how you can spend it. You can opt for a single lump sum or receive regular payments if you wish to use it as a source of income.
• You are not required to make interest repayments, though you have the option. Usually, any interest is rolled up and added to the outstanding loan.

Drawbacks

• One of the big risks of equity release is that it can be expensive. Once interest is rolled up and added to the loan, it can take a sizeable chunk of your inheritance. Some lenders offer inheritance protection, which enables you to ringfence a proportion of your home’s value to be passed on in the event of your death.
• A lifetime mortgage can also affect entitlement to means-tested state benefits, such as pension credit. The tests are based on your income and how much you have in savings.
• Once you’ve taken out a lifetime mortgage, you won’t be able to secure any additional loans against your home. However, your lender may allow you to release further equity from your loan.

2. Downsizing

This is a process where you sell your property and move to a less valuable one. It’s a way of using your home’s value to beef up your retirement funds.

For example, if your current home is worth £450,000 and you move to a property worth £300,000, this would free up £150,000 in cash, minus any expenses.

Just like equity release, there are pros and cons to downsizing. Let’s examine these.

Benefits

• Buying a cheaper property can free up significant cash, especially if you own your home outright. As opposed to securing a lifetime loan, you can live your life mortgage-free.
• If the new property is smaller, which is likely, you can also save money on living expenses as bills and general upkeep will be lower. If you’re spending less time maintaining your home, you have more time doing things you enjoy.
• A smaller property may also be more suitable for your retirement needs. It’s possible your children once occupied your home. As they will have now flown the nest, the extra space and bedrooms may not be needed.

Drawbacks

• Your current home may have sentimental value, which would be lost if you moved. It’s where you and your loved ones shared fond memories.
• If there aren’t opportunities to downsize in your local area, you might be forced to move away from a neighbourhood surrounded by family and close friends. While your financial situation will improve, your social life may suffer – at worst, you could become isolated.

What next?

Given this is a big decision that can have implications for you and your loved ones, it’s important to be confident that you’ve made the right choice.

Seeking expert advice can make the decision easier.

We can match you with a financial professional who can take stock of your current financial situation, as well as your future goals, and guide you to the course of action which is right for you.

Click below to connect with the right financial expert for you.

Learn more: Remortgaging to release equity