Should I use Equity Release or Downsize: Which Option Suits Your Retirement Needs? 

If you have tied up equity in your home, deciding how to access it can be difficult if you don’t know where to start. Which is why our experts have put together some information to help you weigh up the question “should I use equity release or downsize”. 

Whilst equity release and downsizing are popular ways for homeowners to access cash in retirement, it’s important to seek professional financial advice when considering these options to ensure you make the best decision for your circumstances. 

How much money are you looking to release? 

Before you begin weighing up the options, it’s important to know what those options are and if they can help you raise the amount of money you’re looking for. Whilst both options may be viable if you’re only looking to release a small amount, if you are looking for a particularly large cash lump sum, your options may be limited. 

There are a number of options that may also limit your options such as house prices in your local area and if you have any outstanding mortgages or secured loans against your home. 

When downsizing, the money left after selling your home and paying off any outstanding mortgages or loans is what you can use for your next property or other financial goals. 

How much equity do you have stored in your home?  

To understand the funds available in your home, you’ll need to calculate how much equity is stored in your property. This is equal to the value of your home, minus any outstanding debts or secured loans. 

For example, if you own a £200,000 home and you have a mortgage of £50,000 left, the total amount of equity in your home is £150,000. However, it’s important to note this is not the full amount that you will be able to release through an equity release plan, as your provider will need to take into consideration the interest rates and other factors such as your age and property value when determining how much you can release. 

There are various equity release options available, such as lifetime mortgages and home reversion plans, each with different features and implications for how much equity you can access. 

Weighing up your options: how can you release equity from your home? 

Weighing up your options for releasing equity from your home really comes down to what works best for your lifestyle and future plans. 

Some people choose to downsize to a smaller property, freeing up cash by moving somewhere with a lower property value. Others look at remortgaging, which is a traditional mortgage option for releasing capital from your home by switching to a new mortgage deal to unlock some of the value in your property. 

Another option is to consider equity release products, such as lifetime mortgages or home reversion plans, which are specifically designed for older homeowners. Unlike traditional mortgages, equity release products allow you to access funds without the need for monthly repayments, and the amount owed is typically repaid when the home is eventually sold. This means you can release tax-free cash and enjoy extra funds in later life while still retaining the right to live in your home. 

Releasing money through equity release schemes 

Equity release can be a great way for homeowners aged 55+ to access the equity tied up in their home without needing to move out. There are different types of equity release plans available, including home reversion plans and lifetime mortgages. It’s important to understand the process of equity release plans and seek professional advice to choose the right option. 

A lifetime mortgage is essentially a loan secured against your home; you maintain full ownership of your property and the loan (plus any interest) will be repaid when you pass away or move into long-term care. These equity release schemes allow you to access tax free cash from your home, providing a lump sum or flexible drawdown options. 

A home reversion plan works a little differently; you sell part or all of your home to a provider in return for a lump sum or regular income, while still being able to live in the property rent free for the rest of your life. When you pass away or move into long-term care, your home will be sold and the provider will reclaim the percentage they own at market value. 

Both options can give you extra financial flexibility in retirement, though they work in different ways and will affect how much of your home’s value you can leave as an inheritance. Once you choose a plan and provider, you will receive a formal offer outlining the terms of your equity release. 

How much does equity release cost? 

One of the biggest factors when homeowners are deciding between equity release and downsizing is the up-front costs to proceed with each option. When it comes to equity release, a lot of the expenses involve one-off setup charges, things like arrangement fees, legal fees for your specialist solicitor, property valuation fees, and advice fees from an equity release expert. These costs vary depending on the provider and the complexity of your circumstances. It’s worth noting that these fees don’t come in a flat rate, some providers may offer a free arrangement fee, while legal and valuation costs can depend on the firm so it’s important to shop around for the best advice within your budget. 

Some equity release products may include an early repayment charge if you pay off the loan ahead of schedule. The lender’s terms will specify the conditions for repayment and any associated fees, so it’s essential to review these carefully before proceeding. 

What is downsizing?  

Downsizing simply involves moving from your current home to a smaller, less expensive property. This is often a popular choice for older homeowners to release equity in retirement as a smaller property can often meet retirement and mobility needs whilst releasing the equity stored in their home to use as they wish.  

Downsizing can often come with many benefits and can reduce household costs including council tax, energy bills and maintenance costs. By moving to a cheaper property, you can unlock a lump sum of cash that can be used to boost retirement income, pay off debts, or help family members financially. Downsizing can also offer lifestyle benefits, such as moving closer to loved ones or choosing a home that’s easier to manage day to day. 

However, downsizing isn’t always the right option, especially for homeowners who have lived in their home for a long time and do not wish to move, or do not have the funds available to pay for any moving costs up-front.  

How much does it cost to downsize? 

Downsizing can be a practical way to release equity, but it’s important to consider the costs involved. When moving to a smaller property, you’ll need to factor in a number of costs including estate agent fees, stamp duty, legal fees, surveyors’ fees, and the cost of an Energy Performance Certificate, as well as general moving costs like removals. 

For retirees on a fixed income, downsizing can help reduce living expenses and make it easier to maintain affordability. Additionally, moving to a new property may affect whether you need to pay property rent, depending on your ownership arrangement. 

Depending on your situation, there may also be additional expenses, such as capital gains tax if you’re selling a second home, or mortgage fees if you’re taking out a new mortgage on the property. All of these can add up, so it’s worth doing the maths before deciding if downsizing is the right route for releasing equity. 

Is Equity Release Cheaper Than Downsizing? 

Whether it’s cheaper to downsize or use equity release really depends on your personal circumstances. Downsizing can often free up more money because you’re selling your current home and buying a less expensive one, but you’ll need to cover moving costs, stamp duty, and estate agent fees, which can quickly add up. 

Equity release, on the other hand, lets you stay in your home and access some of its value without moving, but the interest on a lifetime mortgage or the reduced value from a home reversion plan may mean it costs more in the long run. 

Accessing funds through equity release or downsizing could affect your eligibility for means-tested benefits, including pension credit, so it’s important to consider this in your decision-making. 

The “cheaper” option isn’t the same for everyone, it depends on how much equity you want to access, whether you’re happy to move, and what matters most to you: maximising inheritance or maintaining your current lifestyle. 

Planning ahead for your financial goals 

Before deciding between equity release and downsizing, it’s essential to define your financial goals for retirement. Consider what you want to achieve: Are you looking to boost your retirement income, pay off debts, help family members by gifting money, or simply enjoy a more comfortable lifestyle? Think about your future goals, such as maintaining a manageable property, covering living expenses, or preserving as much inheritance as possible for your loved ones. 

It’s also important to factor in your current financial situation, including any outstanding mortgage, your eligibility for means tested benefits, and your long-term care needs. Setting clear priorities will help you choose the right option and ensure your decision aligns with your personal values and financial objectives. Consulting a qualified financial adviser can help you understand the tax implications, inheritance tax considerations, and all the costs involved, so you can make an informed choice that supports your financial future. 

Your local equity release specialists 

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 0800 411 8668 or try our free online equity release calculator.