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Is Equity Release Cheaper Than Downsizing?

Equity Release Specialist and Retired Lady

Many of us plan to move or downsize our home in retirement. The children have moved out into homes of their own, the travel routes to the city aren’t quite so important now that you are retired, and moving somewhere smaller would be cheaper and save money… right?

Not always. For those of us planning to downsize to release some of the equity from our properties, recent figures are pointing to this option being an increasingly expensive route.

According to research by Lloyds Bank*, the cost of moving home in the UK has soared by £870 during the past year to an average of £10,996 – or a whopping £16,828 for those in the south east.

The figures mount up further when you consider the additional cost of making repairs to your new property after moving in. Figures from the Money Advice Service warn people to expect to stump up around £5,750 to bring their new home up to scratch.

The costs of Moving

  • The largest increase in the cost of moving lies with estate agency fees; in 2016 they rose by £402 to an average of £5,404.
  • The average Stamp Duty to pay is £2,504 (£372 more than a year earlier).
  • Legal fees are averaging £1,251, plus £1,111 for removals companies.
  • There is also an average cost of £665 for surveyors’ fees and £60 for an Energy Performance Certificate.

What has caused the increase?

The main issue is that many of the costs of moving are directly linked to the purchase price of the property.

House prices rocketed by 8.3% in the year between July 2015 – July 2015, according to the Office for National Statistics. So the 9% jump in moving costs is mostly attributed to the necessary services following suit.

Unfortunately for those living in the south east, homeowners in the region are affected by the biggest increase in percentage terms. People there are being hit with an average of £16,828 in moving costs – then an average of £5,750 in repair costs once moved in, a total of £22,578!

With moving costs increasing as they have been doing, could homeowners decide it is cheaper to stay where they are and extend or update their current home in retirement?

The Equity Release Solution

The increasingly popular option of equity release enables homeowners aged 55 and over to benefit from their house price increases, without having to sell their property.

Furthermore, the overall costs of equity release have reduced in recent years as interest rates continue to fall.

Take the latest deal by Aviva, one of the offers currently available through Bower. The Lifestyle Flexible Option plan offers a low rate of just 3.69% which is fixed for life, and an arrangement fee of just £5.

The Costs of Equity Release

As an example, Barry Jones, a 69-year-old homeowner, has a £300,000 property in the south east and no mortgage. He would prefer to avoid the upheaval of selling the home that he has lived in for thirty years, but could do with making some improvements to it.

He is considering equity release as a way to make his property more retirement friendly, perhaps by extending to add a downstairs bedroom and bathroom.

His specialist says he could unlock around £90,000 from his property value, but Barry is happy to just release £24,995 – a total of £25,000 when he includes the £5 arrangement fee that the plan charges. He knows he also has the potential to unlock more in the future if he wishes to.

The costs he needs to pay include a £210 valuation fee, and the mortgage intermediary fee, which in this instance comes to £1,842.

This flexible plan allows Barry to make voluntary payments of up to 10% every year to reduce the interest – but if he chooses not to, the interest will simply roll up.

Sixteen years after taking out his equity release plan, Barry passes away at the age of 80. He had chosen not to make any interest payments during the life of his plan, so the original loan amount of £25,000 plus interest (£19,640.60) comes to £44,640.60, which is paid when his home is sold. Any remaining equity is passed to his loved ones.

Costs of moving vs. equity release

The total costs of Barry’s equity release plan after 16 years equates to £19,640.60 in interest + £210 valuation fee (already paid) + £1,842 (already paid). A total cost to him of £21,692.60.

The total costs of this equity release scenario work out at £885.40 less than the £22,578 average costs incurred had he moved and made home repairs in the south east in 2016.

But by arranging a lifetime mortgage, Barry was able to remain in his own home for his retirement, using his tax-free cash to adapt his property for his later life needs.

Speak to a specialist

Providers are offering some of the lowest rates on record, so now could be an ideal time to unlock the equity from your home to spend on anything you choose.

With so many options to choose from, it is always recommended to seek the guidance of an independent specialist in retirement lending before making a decision.

Your Bower specialist will take the time to explain all the advantages and disadvantages of each type of plan. You will never be under any pressure to proceed, and they will explain how equity release will reduce the value of your estate and will reduce the amount of inheritance you leave.

Speak to us today to arrange your free, no-obligation initial consultation on [tel].

*Zoopla Sept 2016