All of our content is approved by our in-house expert advisory panel.
Whether you’re looking to boost your retirement income or support your family, downsizing or equity release might be right for you.
Accessing the equity in your property can provide extra money to pay for things in your retirement. However, unlocking this equity requires you to consider equity release options such as downsizing or equity release products like lifetime mortgages.
This guide will explain the practical and financial implications of downsizing and equity release.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
Is downsizing or equity release right for me?
If you’re looking to access the money tied up in your property as you head into retirement, downsizing or equity release could be a couple of options. Equity release can unlock tax-free cash from the value of your home by using products such as lifetime mortgages. Downsizing, on the other hand, involves selling your home to pay for a cheaper property and banking the profit.
Whether you’re planning your retirement, looking at ways to replace lost income, or want to help others financially, you may want to consider downsizing and equity release as part of your future plans.
What is equity release?
If you’re aged 55 and over and a UK homeowner, you could unlock money tied up in your property in the form of tax-free cash, known as equity release.
Equity release describes a group of products including lifetime mortgages and home reversion plans that are secured against your property. It’s a loan that’s repaid using the value of your property when you pass away or need long-term care.
Depending on the specific product, you can choose to receive equity release as a lump sum or a series of smaller payments that would give you a regular income.
Taking out equity release will, however, reduce the amount of inheritance you’ll leave for your chosen beneficiaries when you pass away. Therefore, it’s important to consider the benefits and potential drawbacks of equity release before deciding.
What are the benefits of equity release?
There is a wide variety of benefits to equity release which include:
1. Remain in the same house
Equity release allows you to stay in your home while you access the equity tied up in your property. If you’re reluctant to move, equity release could be a practical option.
2. Tax free
The money you receive is tax-free and can be spent however you like. You’ll have to use the money released from your property’s value to pay off any remaining mortgage you may have, and the rest is yours.
3. Flexibility
Some types of equity release offer flexibility that matches your personal circumstances. For instance, a lifetime mortgage can provide a one-off lump sum to fund a specific expense, such as university fees or essential home repairs. Alternatively, lifetime mortgage drawdown allows you to access your money over time and when you need it rather than all in one go.
4. Retain ownership of your home
With a lifetime mortgage, you’ll still own 100% of your home. Some products even allow you to move property after taking out equity release.
5. Make repayments
Some equity release options allow you to pay off the interest in regular instalments. This will reduce the amount you owe over the terms of the loan.
6. No negative equity
Equity release products that comply with Equity Release Council (ERC) regulations come with a no negative equity guarantee. This means you’ll not pay back more than the value of your property when it is sold.
Need help with equity release?
Releasing equity from your home isn’t an easy decision. For a free and impartial chat, speak to one of our friendly advisers.
You can also order a free Equity Release brochure.
What are the risks of equity release?
There are risks associated with equity release that you should be aware of. These include:
1. Reduced inheritance
Your equity release provider is repaid when your home is sold, so you can’t pass on the property to others as an inheritance. Even releasing a small amount of the equity tied into your home will reduce the overall value of your estate.
2. Interest charges
The debt on a lifetime mortgage increases through compound interest, where the interest is calculated based on the value of the loan plus interest accrued. Therefore, the longer you have the loan, the more you’ll have to pay when the property is sold.
3. Restrictions on equity access
The amount you can access through equity release depends on many factors such as the value of your home, your age, and your current mortgage status.
4. Fees and upfront costs
Like most financial products, equity release typically involves arrangement fees payable to the plan provider. From financial advice and legal fees to administration costs and property valuations, these costs can mount up in line with the amount of equity released and the type of plan you take out. You may be able to add the fees to the loan if you can’t afford them upfront.
What are the benefits of downsizing?
Downsizing involves selling your home to buy a cheaper property, perhaps with fewer bedrooms or in a new location where prices are lower. You’ll keep the money you get from the sale of the property minus any costs. The benefits of downsizing include:
1. Simple process
Selling your home to downsize or move to a cheaper property can be a relatively simple financial process. You sell your property to purchase a cheaper one and keep the remaining cash to fund your retirement, give to others, or spend however you like.
2. 100% property ownership
The new property you buy will be 100% yours and mortgage free. So, if you pass away, it can be left to your chosen beneficiaries as an inheritance.
3. Greater efficiency
A smaller or more modern property could deliver greater efficiencies over your current home. Lower energy bills along with reduced maintenance costs could make a new home cheaper to run.
4. Future planning
If you’re approaching your latter years and face mobility challenges, you may decide to sell your property to buy a practical home such as an apartment or bungalow.
5. A fresh start in life
If you’ve retired from work and are looking to move closer to family, downsizing could be an attractive option. Not only will you be nearer to your loved ones, but you can use any profits from the sale of your home to enjoy your retirement.
What are the drawbacks to downsizing?
Even when downsizing, moving house can be expensive for a variety of reasons including:
1. Relocation costs
From estate agent fees and legal fees, to removal costs and possible stamp duty, the price of moving property can mount up when all expenses are factored in.
2. Renovation work
Even when downsizing you may need to pay for significant renovation costs to make your new home the way you want it to be, or more suitable for elderly or limited mobility living.
3. The emotional factor
If you’ve lived in your home for many years, it is likely to have special memories for you and your family. Leaving all this behind to downsize to a new property may seem like too much of an emotional and practical upheaval in later life. Not only that, but it may mean leaving friends you’ve made behind.
Should I downsize or choose equity release?
Both downsizing and equity release are major financial commitments and it’s important that you understand what they mean for you and your family.
Downsizing is a debt-free method of accessing your money, although it will mean moving away from your family home. Equity release allows you to stay in your current home, but it will have an impact on any inheritance you plan to leave to your loved ones and chosen beneficiaries.
For the majority of homeowners, property is their greatest asset. Therefore, it’s not surprising that many people use some of the money tied up in it to fund their retirement.
While there is no one-size-fits-all solution to choosing downsizing or equity release, the best option often depends on many factors such as your age, health, and personal circumstances.
How LV= can help with your retirement planning
Before you proceed with equity release, it is recommended that you speak to a qualified adviser, weigh up the costs and risks, and explore the options available to you.
You can also use our equity release calculator to quickly find out how much tax-free cash you could unlock from the value of your home.
