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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?

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Why might you consider downsizing or releasing equity?

Managing your finances in retirement isn’t always easy.

Even after conducting the most dedicated and prudent planning during your working years, you may find yourself needing or wanting some extra cash at some point.

This is the situation facing some of you right now.

With fuel, energy and food costs significantly higher than they were this time last year, 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 educations costs or saving for a house deposit.

If you’re in any of these situations and own your home, you have access to a couple of 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 both yours and your loved one’s lives.

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

1. Equity release

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

While the product has been around for some time, its popularity has only really taken off in recent years.

Activity climbed 24% to a record £4.8bn in 2021 – more than double the £2bn recorded just five years earlier.

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

As the former is by far 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 home.

During the term, you have the option to make interest and capital repayments.

Benefits
  • The main benefit is that it allows you to stay in your current home. It means you can avoid moving to a less desirable property, or relocate to a cheaper area away from friends and loved ones. If you’ve lived in your current home for many years, it’s possible you’re 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.

  • There’s no requirement for you to make interest repayments, though the option is there for you. In most cases, 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 offspring’s 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 some 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.

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2. Downsizing

This is a process where you sell your property and move to a less valuable one.

It’s 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, of course.

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, it means you can live out 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 the family home was once also occupied by your children. 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 many fond memories.

  • If there aren’t opportunities to downsize in your local area, you might be forced to move away from a neighbourhood where you’re 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 both you and your loved ones, it’s important to be filled with the confidence 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

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We’ll find a professional perfectly matched to your needs. Getting started is easy, fast and free.

About the author
Craig Rickman is senior content writer at unbiased.co.uk. He has been writing about personal finance and wealth management since 2016, including four years as a journalist at the Financial Times Group. Prior to this, Craig spent eight years working as a regulated financial adviser. He holds the CII level 4 Diploma in Financial Planning.