By Tom Philips at September 30, 2022

Equity Release Vs Downsizing Your Home

Many of our customers come to us with the common question: what is the difference between equity release vs downsizing your home?

You may be aware of the essential differences, but we are here to explain them in detail and help you to discover which option is best for you.

What is Equity Release & How Does It Work?

To begin with, equity release is a scheme that is targeted at people of retirement age who have valuable properties and yet are struggling to fund their lifestyle as they do not have access to much cash.

If you enrol onto an equity release plan, whether it’s a lifetime mortgage or a home reversion plan, you will get a loan that is secured against your property, and in return, the equity release lender will sell your home when you pass away or move into long-term care, and take enough of the proceeds to cover the amount you lent from them.

To discover the difference between a home reversion and a lifetime mortgage, have a look at each plan on our plans page. Or if you would like to know how equity release works in detail, visit this page.

Advantages Of Equity Release

1. You can make money quickly

Firstly, if you decide to take out equity, you get to benefit from something you have already earnt. Living in a valuable property doesn’t reap many benefits if you cannot access the value it holds, but equity release allows you to directly benefit by allowing you to dip into the funds in your property.

2. You don’t have to move house

Secondly, you do not have to move home to release equity, provided that your home is worth at least £70,000 and is in a good enough condition. This is excellent news for people who are unable to move, whether it be due to a disability or old age.

It is also good for people who do not want to live in a different property. Perhaps they have lived in their home for their entire adult life and they never plan to leave.

Equity release gives them the opportunity to stay while increasing their finances.

3. You do not have to pay tax on the money

Finally, the money you receive through equity release is tax-free, so you get to receive all of it (1). This means you may be able to boost your income more through equity release than you could through downsizing.

This is particularly true if you live in a highly valuable home. Other factors can increase the amount you can borrow, such as living in a desirable area and being on the older end of the age scale.

Disadvantages Of Equity Release

Below, we outline some of the potential drawbacks of taking out equity release:

1. It involves getting into debt

Firstly, when you decide to take out equity from your property, you are getting into debt (2). Even if you do not see this debt as it is only dealt with after your death, you will be aware that the interest on the loan is racking up, meaning you are increasingly owing more money.

2. You have to fit the eligibility criteria

Secondly, not everyone is entitled to an equity release loan, so this isn’t even an option for some homeowners.

For a lifetime mortgage, you must be 55 years old, and a home reversion requires you to be 65 years old. All equity release consumers must also own a property that is worth at least £70,000, and this property must be their primary residence.

3. Equity release is a big commitment

Finally, equity release is a big commitment that not everyone is ready to make. If you choose to use an equity release product, you will have to agree to certain rules, which may involve not moving house and not making repayments.

Most schemes tend to be flexible nowadays, but it is possible that you will find yourself trapped in terms of the decisions you can make for your future.

Who Qualifies For Equity Release?

To qualify for equity release, you must own a property worth £70,000 or more and you must be at least 55 years old. You also should have paid off your mortgage, unless you are hoping to use equity release as a means of paying off an existing mortgage.

What is Downsizing & How Does It Work?

Downsizing involves selling your property to move to a more affordable property. Though the name suggests you are moving to a smaller property, this is not always the case, as you could choose to live in a more affordable area.

However, it is common to move to a smaller property in your later years as you may have plenty of extra rooms that you no longer need to use, and this can make the house more difficult to maintain. It can also make pensioners feel lonelier as they feel as though the house is better suited to large families.

Advantages Of Downsizing

Below, we outline some of the advantages of downsizing your home:

1. There is no debt involved

Firstly, if you choose to downsize, you do not have to get into debt. This is a huge benefit as it means you could have more money overall in retirement, and you would also have more money to pass on to your family when you pass away.

2. You get to live in a different property

Secondly, if you already want to move house for whatever reason, downsizing may be the perfect opportunity to do this (3). For example, you may want to move closer to family, closer to nature, or to a property that is better suited to people in their later life. If you downsize, you could seek out a property that meets your needs.

3. Your bills may be reduced

Finally, there is a huge chance that you would be paying out less on bills if you downsized. This is particularly important with the rising costs of living, as there would be nothing worse than releasing equity from your home only to find that it didn’t cover the costs of everyday life.

Disadvantages Of Downsizing

Below, we outline some of the potential disadvantages of downsizing your home:

1. Moving home is stressful

Firstly, downsizing involves moving home, which everyone knows is one of the most stressful things you can do in life. It is time-consuming at the best of times, but there are often delays involved that can complicate the process.

What’s more, if there is a chain involved in your desired property, you will have to deal with other people’s delays as well as your own.

2. You have to find a suitable property

Secondly, it is easier said than done to find a suitable property to move into. Property prices are sky-high in most areas of the UK, and it may not be possible for you to purchase a new home that is the right size, in the right area, and has the right layout for you.

3. You may want to stay in your current property

Finally, you may simply not want to move home. Perhaps you have renovated your home to make it the perfect environment for you, or maybe you are living in the same area as some close family and friends and you aren’t prepared to live further from them. This would make downsizing a bad option for you.

Who Qualifies For Downsizing?

One good thing about downsizing is that nobody has to qualify, so to speak. Anyone can sell their home and move into a smaller one, provided that they are willing to go through the sale process.

Equity Release Vs Downsizing Your Home: What is the Difference in Cost?

In terms of short-term costs, equity release tends to be more affordable than downsizing. This is because you only need to pay for fees such as legal fees, advice fees, and application fees. Many firms including Equity Release Warehouse offer free initial consultations, which also reduces the overall cost.

Generally, you can expect to pay no more than £5000 on the fees, but this depends on the decisions you make along the way as it’s up to you to choose your solicitor, equity release adviser, and financial adviser.

On the other hand, downsizing is more expensive at the beginning (4). You have to consider costs such as using a removals company, paying a solicitor for the legal processes, paying for a valuation and property surveys, and potentially paying an early repayment charge for ending your mortgage early.

These costs add up, and you may end up spending £10,000 or more overall.

Having said that, it goes without saying that you end up owing lots of money with equity release, so in this sense, you could say that equity release is more expensive. Not only do you borrow a set amount from the equity release provider, but you also pay interest on this amount for the rest of your life.

Some people would not count this as a cost, as you do not have to repay the loan yourself. However, it is wise to remember that it will put a dent into the number of funds you leave behind when you die, so it does have an impact on your family.

Equity Release Vs Downsizing Your Home: Which is Safer?

One could argue that downsizing is safer than equity release, as it does not involve getting into debt. Once you have paid the cost of moving house, the money that is left over is your money, and you don’t have to worry about owing anything to a provider.

However, we take issue with equity release being referred to as unsafe, given that it is very well-regulated in the UK. As long as you do your research into the scheme and make sure you select a plan that works for you, it will be an incredibly safe arrangement.

Equity Release Vs Downsizing Your Home: Impact On Inheritance

Without a doubt, downsizing is the way to go if you want to leave a large inheritance to your family. This is because all your money is your own after you move house, whereas with equity release, the lender will take a lot of it when they sell your home.

This is not to say that downsizing does not reduce the amount you can leave to your loved ones, as any scheme that involves you spending money will do this. However, there is less of a reduction with downsizing than there is with equity release.

However, equity release might give you the funds you need to help your family out with their finances right now, rather than waiting until you have passed away.

You can gift money to your loved ones and they do not have to pay tax on this money for 7 years after they receive it, provided that you are still living seven years later.

What’s more, though you will have less money to pass on with equity release, you will still have an amount you can leave to your beneficiaries. You can request to protect a certain amount, and most lenders already have inheritance protection as part of their schemes.

Equity Release Vs Downsizing Your Home: Which One is Faster?

Usually, it is much quicker to release equity from your home than it is to downsize. The equity release process lasts up to two months without delays, whereas the average time for moving house tends to be between 8-22 weeks.

It is also extremely common to face delays when moving house, particularly if there is a chain involved. What’s more, you may spend a very long period of time searching for a suitable property which can lengthen the process.

Can I Use Equity Release to Downsize?

Yes, you can sometimes use equity release as a way of downsizing, but it is not recommended that you set out to do this. Most lenders would prefer that you don’t move house during the scheme, so it isn’t wise to go into equity release with the plan of downsizing.

However, if you are already an equity release consumer and you would like to downsize, it may be possible. Speak to your lender about providing you with a suitable alternative home, which they are required to do if they are a member of the Equity Release Council (ERC).

However, if you choose a home that is not approved by the lender and you are not willing to be offered a different one, you would have to finish the scheme early (if this is permitted in your plan) and potentially pay an early repayment fee.

This is unless you have downsizing protection as part of your equity release plan (5). More and more lenders are offering this, and it allows homeowners to move into a new home without having to pay to end the equity release scheme.

Can I Downsize In Order to Release Equity?

Yes, you could theoretically downsize to release equity from your home if your current property is not eligible, or you would not be prepared to live in your current property for the rest of your life.

However, the new property would have to fit the eligibility criteria, so it would have to be worth at least £70,000. If your current home is worth less than this, it wouldn’t be possible to downsize to release equity as the second home would not be valuable enough to be approved by a provider.

When is the Best Time to Release Equity?

Anyone who is eligible for equity release should consider getting involved as soon as they can. As long as you have done adequate research into it, we recommend starting as soon as possible.

This is because you will owe a certain amount at the end of your life anyway, so you may as well start now and benefit from the tax-free cash sooner rather than later.

When is the Best Time to Downsize?

Again, we would advise downsizing sooner rather than later. You do not want to be in a position where you have left it too late and you feel as though you aren’t young or healthy enough to move house. You should also remember that the process can take a long time, so it’s better to get started now in case there are any significant delays.

If you aren’t quite ready to make a start, you should at least look at properties you are interested in to get a feel for what you want out of your property, as well as to figure out what is available in your desired area.

Equity Release Vs Downsizing Your Home: Contact Equity Release Warehouse Today

Please do not hesitate to get in touch with us to learn more about equity release vs downsizing. Our equity release advisers would be delighted to explain the benefits of equity release to you, whilst also being honest about the drawbacks and the fact that downsizing may be better for you.

There is no right answer as to whether equity release or downsizing is superior, as it depends on your personal circumstances.

This is why it’s so important to speak to an adviser, as they can help you to weigh up your options and make a decision that benefits you and your family.

We offer a free consultation to all new customers, so please call us on 0330 058 1579 if this interests you. We are also happy to get in touch with you first if you enter your details here.

There is no obligation to make an equity release application when you contact us, so you will not be under any pressure.

References

[1] What are the pros and cons of equity release? https://www.sunlife.co.uk/equity-release/what-is-equity-release/equity-release-pros-and-cons/

[2] Is equity release right for you? https://www.which.co.uk/money/pensions-and-retirement/youre-retired-working-on-benefits-equity-release/equity-release/is-equity-release-right-for-you-ap9jq6x38470

[3] Should you downsize? https://www.which.co.uk/money/pensions-and-retirement/financing-later-life-care/later-life-housing-options/should-you-downsize-aqcvn4w6kz0f

[4] Advantages and Disadvantages of Downsizing https://goodmove.co.uk/blog/selling-advice/advantages-and-disadvantages-of-downsizing/

[5] Mythbuster: “I won’t be able to move home” https://www.keyadvice.co.uk/equity-release/mythbusters/will-i-be-able-to-move-home