Is it better to downsize your home or release equity?

Two common methods to unlock the capital in your home are equity release and downsizing

We consider the benefits and drawbacks of each.

If you've accumulated a sizable amount of equity in your house that you'd like to spend but don't know how to access, you have two options: equity release or downsizing.

Both are popular choices for senior citizens who own homes. The Equity Release Council, an industry association, reports that in the final three months of 2024, the average lump sum borrowed through an equity release mortgage surpassed £115,000. The average amount of money saved by relocating to a smaller, less expensive home so far this year is 134,405, according to data from moving experts Reallymoving.com.

However, which is the best choice?

The purpose of this guide is to help you weigh the advantages and disadvantages of each option so you can determine if taking out equity release or downsizing is the best course of action.

What does equity release mean?

You can obtain a specialized form of financing known as equity release if you are a homeowner 55 years of age or older.

When the final surviving homeowner passes away or enters long-term care, the contract expires or the debt is paid back from the sale of your house. It is a cost-effective retirement option because there are no monthly repayment obligations.

What are mortgages for life?

One of the most popular forms of equity release is a lifetime mortgage.

It's comparable to a traditional mortgage in that a lender consents to lend you a certain amount of money at a predetermined interest rate determined by the value of your house.

Your home is still yours, and if you are unable to make the monthly payments, they can be added to the loan and paid back with the money you make from the sale of your house.

You have two options: set up a drawdown facility, which functions similarly to an overdraft, or accept the funding in one lump sum. Interest will only be charged on the money that was taken out.

Home reversions: What are they?

A home reversion plan entails selling all or a portion of your house to the plan provider in return for tax-free lump sum payments or ongoing installments. You will be given a lifetime lease on your property, meaning you can live there for the rest of your life without paying rent.

After the last surviving homeowner passes away or enters long-term care, your plan comes to an end, much like a lifetime mortgage. The proceeds of the sale of your house are divided between you and the provider in accordance with your respective ownership shares.

What is the procedure for releasing equity?

With a few exceptions, taking out an equity release is comparable to taking out a regular mortgage.

Step 1: Locate a financial planner or equity release adviser who can offer guidance on equity release plans. By using the Equity Release Councils website, you can look for an expert who has complied with the council's code of conduct and is a member.

Step 2: Your adviser will determine whether equity release, in contrast to other methods of releasing cash from your home, is the best choice for you. Once the best lender and plan have been recommended, your application is sent in.

Step 3: To determine the value of your house and whether its condition and type are appropriate, your lender orders a survey.

Step 4: Bring in a lawyer with experience in equity release cases.

Step 5: A mortgage offer is made to you and forwarded to your attorney. The process of conveyancing starts.

Step 6: Consult with the attorney to get their opinion.

Step 7: Get the money and agree on a completion date.

Is it better to downsize or release equity?

David Forsdyke, head of later life finance at Knight Frank Finance, says that the best course of action will depend on your goals and priorities.

He stated that "it's really important to consider all the financial and non-financial factors when deciding which option is best."

In order to assist you in making a decision, advisors will examine your financial situation, including your income and expenses, potential future wealth, the possibility of having to cover medical expenses, and how you plan to pay for them.

Advisors will also examine your financial plan to determine whether you can live where you are comfortably. They will also ask you about your feelings about leaving your village and community and whether you think your current house will be safe and manageable as you age and become less mobile.

What advantages does downsizing have over releasing equity?

By downsizing, you avoid taking on debt to release equity, which means that the interest your lender charges won't erode the future value of your house.

In addition to being less expensive to maintain, a smaller property will probably have lower energy and council tax costs. For retirees on a fixed income who aren't keeping up with price increases, this can be crucial.

You can select a home that will better meet your needs as you age, like a bungalow or a property that is closer to your family or nearby amenities, while also releasing funds to support you in retirement or give as a gift to family.

What are equity release's advantages?

By using equity release, you can continue to live in your house and use the equity that has accumulated over time.

The owner of Andy Wilson Financial Services and an equity release specialist, Andy Wilson, stated: "Homeowners should not undervalue the emotional toll that moving later in life can take, especially if they have recently experienced a loss or are moving due to illness.

"Leaving the house they have known for a long timeoften the family homeis an emotional ordeal for many people. I give that to people to make sure they understand the situation, not to dissuade them.

Here are some additional advantages of taking out equity release, in addition to avoiding the hassle of moving.

You are not required to make repayments if you are unable to. You can ring fence some of your equity to leave as an inheritance, and you have the opportunity to continue living in a house with which you have close ties. Without having to move, you can give family members gifts by liquidating some of your wealth. Inheritance tax benefits may result from this since it reduces the taxable value of your home while allowing you to give money from your estate. In comparison to the cost of moving, the fees are comparatively low. According to moving experts Reallymoving.com, the average cost of an equity release loan is £14,000 when stamp duty, estate agent fees, and solicitor costs are taken into account, while the cost of an equity release loan is between £2,000 and £3,000. A drawdown lifetime mortgage allows borrowers to receive their money over time. Rather than getting a lump sum from the sale of your house, you can take out cash as needed up to a predetermined amount, which makes managing the money easier. You can also prevent yourself from going over the government-imposed savings cap, which may impact your eligibility for certain means-tested perks.

What dangers come with releasing equity?

The following are the risks of equity release that an equity release adviser must go over with you before setting up your application.

If you decide not to make any payments, the cost of borrowing will reduce the amount of equity you still have in your house. If you pay back the loan early, you will be subject to significant early repayment penalties. Certain lenders will bind you to the plan for a minimum of 15 years. For others, the agreement is permanent. You may be limited in the kind of property you can purchase if you ever need to move, even though you can port your lifetime mortgage with you. You might have to pay back a portion of the debt, depending on how much the new property is worth. If you obtain a lump sum lifetime mortgage and the amount borrowed exceeds the permitted limit, which can range from 6,000 to 16,000, your means-tested benefits may be jeopardized. Observe that interest can quickly compound. The amount you owe may be nearly equal to or even greater than the sale price of your house, leaving your heirs with a debt to settle, severely diminishing the value of your estate.