Is it better to downsize or equity release?
 

Is It Better To Downsize Or Do Equity Release | December 2023

As they approach later life, many property owners in the UK find a large proportion of their money tied up in their own home. This can be a cause for concern, particularly if they are worried about their retirement income.

They might be faced with a decision between equity release and downsizing. There are pros and cons to both options, and it is essential to weigh up all the factors before making a decision.

Equity release can be a complicated process, and there are a number of downsizing myths you might hear. You should always consult an independent financial adviser before making any big decisions, but this article will help you to make the choice between equity release and downsizing.

Topics that you will find covered on this page

What is equity release? 

Equity release schemes provide a method of borrowing against the equity (the money you put down) in your property without having to move out. Lifetime mortgages and home reversion plans are the two main methods of releasing equity.

How does equity release work?

Lifetime mortgages

Unlike more traditional mortgages, a lifetime mortgage is an equity release product under which you borrow money against the value of your home. The equity loan and interest are only paid back when the property is sold – generally after you pass away or enter long-term care.

Home reversion schemes

With a home reversion scheme, you sell all or part of your property to a home reversion provider in return for a tax-free cash sum or regular payments. The home reversion company will usually pay you a percentage of the full market value of your property, rather than the full value.

You retain the right to live in your property rent free until you die or go into long-term care, after which it will be sold and the equity release provider will keep the proceeds.

However, you will no longer own part or all of your home so while you can live in your property rent free you won’t benefit from any increase in house prices on the percentage of property sold.

Why do people choose equity release?

There are a variety of reasons why someone may opt for one of these equity release options if they are looking to release money from their property. Releasing equity might help you earn more money in retirement by providing flexibility to do home improvements or pay off debts.

The lifetime mortgage option can also be used as a way to avoid inheritance tax liability – if the money released to you by the equity release company is used to purchase a life insurance policy, for example. 

Mortgage advisers will be able to aid you with these complex options and point you towards equity release companies with the best deals for your circumstances.

Furthermore, for people who live in a house of average or less than average value in their area, downsizing would only free up money if a new house was purchased in a different area where property prices were lower. In this case you might prefer to choose equity release for raising funds.

use the equity release calculator to see how much money you could release from your property.
Takes less than 60 seconds!

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All equity release and mortgage advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

downsizing house for equity release

Equity Release Pros

There are a number of advantages to taking out an equity release plan, which include:

  • Equity release enables you to stay in your family home for as long as you want
  • The money released by equity released companies is a tax-free cash sum
  • It can be used for any purpose
  • It can provide a way to supplement your income in retirement
  • 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.

Equity Release Cons

Equity release schemes also have some disadvantages which include:

  • An equity release plan could reduce the value of your estate
  • You may have to pay further costs (such as legal fees and set up fees with your plan provider)
  • It could affect your entitlement to state benefits
  • The interest on the loan can add up over time

How much can you borrow?

The amount you can borrow will depend on a number of factors, including your property value, your age and your health.

The older you are and the healthier you are, the more you will be able to borrow as a rule of thumb.

As an example, a 65-year-old homeowner with a property worth £200,000 could release around £70,000 with a lifetime mortgage.

This is based on an interest rate of 4.5% and assuming that the loan is not repaid until the borrower dies or goes into long-term care.

Make sure that you consult a mortgage adviser about any potential equity release plans: they will be able to ensure you end up with an equity release provider that is a member of the Equity Release Council with a ‘No Negative Equity’ guarantee.

What is downsizing?

Downsizing is the act of selling your present home and relocating to a smaller one. It can release some money that can be used to supplement your income or for other purposes.

It can also make it easier to manage your finances and day-to-day living costs, as you will have a smaller property to maintain.

How does downsizing work?

Downsizing usually involves selling your current property and using the proceeds to purchase a smaller and therefore cheaper property. This can be done through a traditional estate agent or by using a specialist downsizing company.

The process can vary depending on the company you use, but generally you will need to provide some information about your property and your financial situation. You will then be matched with a suitable buyer and the sale of your property will be completed.

downsizing myths

Once the sale is completed, you will need to find a new property to move into. This can be done through a traditional estate agent or by searching online.

Why do people choose downsizing?

Downsizing is a popular choice for homeowners who are getting older and want to get rid of equity in their property. It may also be a means to streamline your life while also lowering maintenance and operating expenses.

Downsizing Pros

There are a number of advantages to downsizing, which include:

  • You can release a lump sum of cash that can be used for any purpose
  • It can make it easier to manage your finances and day-to-day living costs
  • It can reduce your carbon footprint
  • A smaller house can be a more manageable property

Downsizing Cons

There are also some disadvantages to downsizing, which include:

  • You may have to pay fees and costs associated with selling your property and moving to a new one (such as valuation fees)
  • It can be stressful and emotionally difficult to move house
  • You may have to downsize your possessions

How much money can you release by downsizing?

The amount of money you can make from downsizing will depend on the value of your property and the size of your mortgage.

As a general rule, the higher the value of your property and the smaller your mortgage, the more money you will be able to release.

For example, if you have a mortgage of £50,000 and your property is worth £200,000, you could release £150,000 by downsizing to a smaller property.

This is based on the assumption that you would need to pay fees and costs associated with selling your property and moving to a new one.

When is the best time to downsize?

The best time to downsize will depend on your personal circumstances.

If you are retired and have no dependents, downsizing sooner rather than later may be the best solution. This is because you will have more time to enjoy your retirement and won’t have to worry about finding a new job or dealing with childcare.

If you have children who are still living at home, downsizing when they have left the house could be a good option. This is because you will have more time to find a suitable property and won’t have to worry about finding childcare or schooling for your children.

downsizing a house

Is it better to release equity or downsize?

The answer to whether you should opt for downsizing a house or an equity release scheme such as a lifetime mortgage or home reversion plan will depend on your personal circumstances including the size of your existing mortgage, house prices in your area, any state benefits you have in place such as council tax benefit, savings credit or pension credit, your ability to make monthly repayments, and many other factors. 

If you need to release a lump sum of cash, downsizing could be the best option. This is because you will be able to sell your property and use the proceeds to purchase a smaller one.

However, if you’re looking for a tax free sum, equity release could be a better idea.

If you are not sure whether downsizing or equity release is right for you, it is important to speak to a financial advisor or to seek specific equity release advice. 

They will be able to assess your individual circumstances and provide guidance on the best option for you.

What’s Right for Me?

Each option has its own advantages and disadvantages, which should be considered before making a decision. It’s best to seek help from a mortgage advisor or from other financial advisers before making any big decisions, but some factors to consider include the following:

Friends and Family

When it comes to downsizing, you may find it difficult to settle in a new area since you don’t know anybody. It’s also possible to relocate closer to relatives or loved ones.

You remain where you are with equity release, which is fantastic if your family is close by but might be tough in later life if they’ve relocated far away.

Leaving an Inheritance

If your priority in later life is to leave a large inheritance, this can impact whether you should downsize or release equity.

If you buy a smaller home, it may be worth less than your present house. This means that the sale of your property will leave a lesser inheritance for your family when you pass away.

Equity release will likely reduce the inheritance you leave due to the compound interest.

If you’re thinking about giving money away to family members or a cause you care about, it’s important to understand tax rules regarding donations and inheritance taxes.

Your Current Property

If your house is ready for retirement and isn’t too big, downsizing may be a waste of time. Furthermore, to determine whether there is a cheaper house on the property market, you’ll need to have a property appraisal done.

If you downsize, it may not be possible to fit grandchild sleepovers and family visits from abroad into a smaller property.

In addition, you’ll need to consider if you’re ready for a lifestyle change.

Can you downsize if you already have equity release?

Yes, you can downsize with equity release. However, there are a few things to consider before making this decision.

For example, if you have a mortgage on your property, you will need to make sure that the outstanding balance is paid off before downsizing.

home downsizing

If you downsized, you may also incur costs associated with selling your property and moving to a new one.

It is important to speak to a financial advisor to assess your individual circumstances and provide guidance on the best option for you.

use the equity release calculator to see how much money you could release from your property.
Takes less than 60 seconds!

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Frequently Asked Questions (FAQ)

Why do people choose equity release?

There are a variety of reasons why someone may opt for one of these equity release options if they are looking to release money from their property. Releasing equity might help you earn more money in retirement by providing flexibility to do home improvements or pay off debts.

What is downsizing?

Downsizing is the act of selling your present home and relocating to a smaller one. It can release some money that can be used to supplement your income or for other purposes.

Why do people choose downsizing?

Downsizing is a popular choice for homeowners who are getting older and want to get rid of equity in their property. It may also be a means to streamline your life while also lowering maintenance and operating expenses.

Is it better to release equity or downsize?

The answer to whether you should opt for downsizing a house or an equity release scheme such as a lifetime mortgage or home reversion plan will depend on your personal circumstances including the size of your existing mortgage, house prices in your area, any state benefits you have in place such as council tax benefit, savings credit or pension credit, your ability to make monthly repayments, and many other factors. 

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Most advisors charge for their service.  But you can get fee-free equity release advice from Boon Brokers.  

Call : 0333 567 1607

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If you take out a product from Boon Brokers, we will receive a fee for introducing you to them.

Unlike most equity release advisors, Boon Brokers do not charge any fees! Have a free consultation to see how they can help.

You can speak to Boon Brokers on the number below and discuss your options

0333 567 1607

Use the equity release calculator and see how much money you could receive.

You can book a call back from for an equity release specialist, who can call you when it's conveniant

All equity release advice is provided by Boon Brokers Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). The Financial Services Register number is 973757. 

 

If you take out a product with Boon Brokers, we will receive a fee for introducing you to them. Boon Brokers provides advice for free and without obligation.  By contacting Boon Brokers through us, the cost of any equity release product would be the same as if you had contacted them directly.  

The fee we receive is used to help keep this site operational and to produce new content.  

 

Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.

Get FEE-FREE Equity Release Advice