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Equity Release or Downsize? Complete Comparison & FAQs

equity release or downsize

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Should I choose equity release or downsize to make retirement more enjoyable? If you’re entering your senior years, you probably want to make yourself as financially comfortable as possible. 

Releasing equity and downsizing from your current home to a smaller one are two options that can do just that. But, which one should you choose – and what are the key considerations? We round up both options below, so you can make an informed decision. 

What is equity release?

Equity release is a type of loan available to senior homeowners. It allows them to access a lump sum or drawdown facility that doesn’t need to be paid back until their home is sold. 

They can continue living at their property without paying any rent, and they are never forced to sell their home. The proceeds of the eventual sale are used to clear the debt.

The home will only be sold when:

  1. The last surviving homeowner passes away. The home is then sold from their estate to clear the debt, which reduces any inheritance remaining. 
  2. The last surviving homeowner moves into long-term care, such as an aged care home. 

The specifics of equity release are dependent on the type of equity release scheme used. 

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A lifetime mortgage and other schemes

The most common type of equity release schemes are lifetime mortgages. These work in the same way as described above, but a fixed rate of interest is charged on the loan. This interest, just like the capital loan amount, does not need to be paid back. Instead, it accumulates and adds to the total debt in the end. An equity release provider may allow you to make voluntary interest payments to reduce the total debt. 

An enhanced lifetime mortgage works as above but accounts for lifestyle and health issues. If you’re deemed to have a shorter life expectancy, the lifetime mortgage could allow you to access more of the equity in your home. 

An alternative way of releasing equity is through a home reversion plan. These don’t usually charge interest but will make a significantly low offer for a percentage of your home. For example, for 50% of your property value when it is eventually sold, they will give you a loan worth 10-20% of its value today. 

The common reason to release equity

The most common reason that seniors release equity is to make their twilight years more comfortable and relaxing, allowing them to see and do things they otherwise may have struggled to afford. 

Others choose equity release to give the money to family members who need it for personal reasons, such as buying property. It can be fulfilling to see the money being used by loved ones, rather than them having to wait for an inheritance. Although waiting would gift them more money. 

What are the advantages of equity release?

The main advantages of equity release schemes are:

  1. You can get a lump sum amount or sometimes a drawdown facility
  2. You’ll never have to make repayments until the sale of your home
  3. You cannot be evicted
  4. The money you receive is tax-free
  5. You can choose to pay interest on lifetime mortgages – or not
  6. You continue living in your current home
  7. The negative equity guarantee prevents you from ever owing more debt than the value of your home when it sells – this is a big one! It means any savings in your estate or other assets cannot be used to clear a shortfall in the debt repayment. 

What are the disadvantages of equity release?

The main disadvantage of using a lifetime mortgage or home reversion scheme is that your will beneficiaries will lose out on some inheritance. There are ways you can safeguard against all of the value of your property being taken by the equity release company, but it remains a fact that some inheritance will be eaten up after selling your home. 

The other disadvantage is the type of deal you can get through a lifetime mortgage or home reversion scheme. If you have had the former for a long time, even standard interest rates can skyrocket the total debt overall. And with the latter, the company will significantly undervalue their offer to reduce their own lending risk – in case the value of your property declines over time. 

Is equity release ever a good idea?

Equity release is sometimes a good idea, but the only person who can determine whether it is a good idea is the homeowner considering it against their personal circumstances and needs. It’s important to fully understand the intricacies of the equity release plan you’re considering, which may involve paying for financial advice. 

Know about the Equity Release Council

If you are considering releasing equity, you should also be aware of the Equity Release Council. This is a group that promotes high standards among equity release companies. Lenders must abide by regulations, and must also be authorised and regulated by the Financial Conduct Authority (FCA). 

You can read about them here

An alternative option – downsizing

If you have considered equity release as a way to make your senior years more financially comfortable, then you’ll have likely considered downsizing as well. By selling your current home and moving into a smaller home, you could create a nest egg for yourself.

So, should you choose equity release or downsize? 

Is it better to do equity release or downsize?

In general, it is financially more advantageous to downsize than it is to release equity. When you downsize, you can seek a fair price for your current home and a fair price for the home you buy. But with equity release, the financial aspect of repaying the loan is less appealing. 

If finance is the only thing that matters to you, then downsizing will usually be better. However, this might not be the only consideration when choosing between equity release and downsizing… 

Equity release vs downsizing (key considerations)

To help you make a decision, here are some considerations and questions to ask yourself:

  1. Do you have a sentimental attachment to your home? Some people find it harder to move away from their current home because they lived there for so long, raising a family and possibly with a recently deceased partner. It can be tough to move away.
  2. Do you have an appetite for the property market? Selling and buying a home can be extremely stressful and you may not wish to get involved with such a process in later life. 
  3. How important will your inheritance be to beneficiaries? Are they already financially secure or will they need as much support from you as possible?

Can you downsize with equity release?

If you have already taken out an equity release plan, it’s still possible for you to move home and even downsize. However, this will need to be agreed upon with your lender and can become complex. If the property is a “suitable alternative”, then the Equity Release Council states that it should be allowed.  

Get help from a financial adviser

We recommend getting tailored support from a financial adviser when considering any type of equity release plan, even if your situation is straightforward. Once you release the equity from your home, it can be difficult or impossible to change your mind. 

Read more about equity release right here!

MoneyNerd has just published new equity release guides covering these complex products from all angles. We use clear examples and simple language so you don’t need a master’s degree in finance to understand how they work. Check them out today!