Downsize vs equity release – which is best?

Updated 3rd May 2022

For the majority of property owners in the UK, our home is our greatest asset, so its unsurprising that many of us look to the money that is tied up in it to help fund our later life and retirement years.

These days there are a couple ways you can unlock the equity from your home; you can decide to downsize to a cheaper property or you could choose equity release.

There are as you may expect advantages and disadvantages to both options. Downsizing is a debt free way of getting your hands on your hard earned cash but it does mean moving away from what is possibly the family home. Equity release on the other hand means you can stay where you are but it will impact any inheritance you plan to leave to family.

The following information will help you explore both options; focusing on the pros and cons of equity release and downsizing so you can think about your requirements and ultimately decide which is the best option for you.

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How much equity do I have?

The equity in your home is the value of the property at today’s prices minus any mortgage you may have against it.

For example if your house is valued at £300,000 but you have a £50,000 mortgage, your equity would be £250,000.

In order to access that money you can do one of two things, you can either downsize to a cheaper property and pocket the money left over or choose equity release:

Downsizing – you sell your property and buy a cheaper property with your equity. This may be a smaller property, one that is in a cheaper area or both. Once you have paid the fees for selling your home and moving into your new one, the remaining balance is yours.

Equity Release – there are two different types of equity release scheme; a lifetime mortgage and a home reversion plan.

With a lifetime mortgage a loan is secured against your property that accrues interest and is only paid off when you either die or move into permanent care and your property is sold. The money you get is tax free and there are no monthly repayments to make, as the loan is paid off from the proceeds of the sale of the house.  

With a home reversion plan you agree to sell part or all of your home in return for a tax free sum of money. No interest is charged and you get to live in your property rent free for life or until you move into care. At this stage the property would be sold and the plan provider would receive payment based on the percentage of the property they own.

couple moving into new home

What are benefits of downsizing?

Downsizing is a debt free way of accessing the cash that is in your property; you still own 100% of the property and you will be able to leave it as an inheritance for family.

In addition, by moving to a smaller more manageable property, you may find that your household bills are lower, so your cost of living could well be cheaper.

Also by keeping in mind your requirements for later life when choosing your new home, you can choose a property that is more easily assessable and easier to maintain, such as a bungalow or flat.

Things to be aware of when downsizing

Moving house is expensive, so the associated costs will eat away at some of money you were hoping to free up. When looking at the cash you could release by downsizing to a smaller property, it is important to take into account the valuation and estate agents fees, stamp duty, legal fees and of course actual moving costs.

To put this into context, based on the average property sold which currently stands at £224,144, the average cost of selling and moving to a new home across the UK is £10,210 but this of course will depend on the value of your property.

And don’t forget on top of that there may be further costs for making home improvements or buying new furniture too.

In addition to moving to a smaller home, downsizing often involves moving to a cheaper area which in turn means leaving the neighbourhood, friends and neighbours you may have known for years. Whilst some may embrace the thought of venturing to pastures new, added to the upset of leaving the family home, others may find this a huge wrench.

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What are benefits of equity release?

Releasing equity from your home gives you a tax free cash sum that you can use how you want, be it improvements to the home or making it more accessible; a so called ‘living inheritance’ for family, a boost to your retirement income or just to make life that bit easier.

With a lifetime mortgage there are no monthly repayments to make, unless you choose one of the equity release schemes that allows you to make regular payments against the interest; you continue to own 100% of your property and you will still benefit from any increase in house prices.

If you choose the drawdown facility on the lifetime mortgage option, you can access your funds as and when you need them but only pay interest on the money you have used.

Also by opting for an equity release provider that is a member of the Equity Release Council, you can be sure that you will never owe more than the value of your home with the ‘No Negative Equity’ guarantee.

If you choose a home reversion plan where you sell part or all of your home in return for a tax free cash sum, you get to live in the property rent free for life, there is no interest charged and you can still leave an inheritance for family.

Things to be aware of with equity release

The interest charged on a lifetime mortgage is higher than more traditional mortgages and mounts up quickly, so it will impact on any inheritance your were planning on leaving to your family, although there are schemes where you can protect a percentage of your property value.

Also if you decide to pay your equity loan off early, costly repayment charges may apply.

With a home reversion plan you will no longer own part or all of your home so you won’t benefit from any increase in house prices on the percentage of property sold. Also the amount the home reversion company will pay for their part of the property will be lower than the market value.

In addition the money paid out may affect any state benefits you have in place, such as pension credit, savings credit or council tax benefit.

How to decide between equity release and downsizing

Whether you choose to downsize or release the equity from your existing home it’s a big decision, so it is important to speak to the experts and look at all the options available to you.

What do you need the money for and how much do you want? Are there any other ways of raising funds? What do your family think? Would you prefer to stay in your own home or are you happy to look to new horizons? Will you be able to live in your property for the rest of your life or would adjustments need to be made?

These are all questions that an expert can help you with, so don’t feel you are on your own. You just need to take a bit of time exploring the possibilities so you can be certain of making the right informed decision.

Compare Equity Release image

Compare Equity Release

We compare equity release interest rates so you can get a better deal. Our 2024 comparison table shows how much it costs. Take a look to find out more.

Is equity release tax free? image

Is equity release tax free?

Yes, the money you unlock from your home with equity release is tax free and you can use it how you wish. However although you don’t pay tax on the equity you release

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