What is Downsize Protection?
Equity release allows people over the age of 55 to take money out of their property, provided that their property is at least £70,000 in value. Many people who take out equity are retired, but some people use equity release products while they are still working as a way to plan ahead for retirement.
Equity release consumers either have a home reversion or take out a lifetime mortgage. They will receive tax-free cash from an equity release lender in the form of a lump sum or regular payments.
There is no obligation for an equity release consumer to spend their money on anything specific, unless they select a plan that is focused on just one thing, i.e. a buy to let plan that allows homeowners to purchase properties to rent out.
However, most customers choose to spend their money on funding their retirement. This often looks like getting monthly payments for bills and other expenses, but it can also involve paying off existing debts, getting home improvements, and purchasing a new car.
It used to be the case that equity release consumers would generally not move house, as once they had released equity, they would stay in their property for the rest of their life per the terms of the scheme.
However, it is now much more common for customers to choose to move house, as equity release has become significantly more flexible. In this article, we will discuss downsize protection, which is one of the contributing factors to the improved flexibility of equity release.
Please call our 24-Hour Helpline: 0330 058 1579
Can You Move House With Equity Release?
Yes, you can move house with equity release, as the scheme is less rigid than it was when it was first introduced.
However, this does not mean that there will not be penalties for moving house. Some equity release lenders will charge an early repayment fee if you want to move, especially if you have not been an equity release customer for long.
Usually, this works on a sliding scale, so newer customers will be charged more money than older customers. For example, some lenders charge a 5% repayment fee in the first year of equity release, 4% for the second year, 3% for the third year, and so on.
This means that if you do not need to move house urgently, you could wait a few years to avoid having to pay a fee.
However, keep in mind that not all lenders charge the fee on a sliding scale, so this is something to investigate before you make a decision. Generally, equity release providers will not charge more than 25% of your initial loan amount.
Overall, you do not have to worry about not being permitted to move house — just having to pay a fee for doing so.
However, something to note is that you will not be able to move into any property of your liking, as your lender must approve it. This only applies if you want to continue with equity release, rather than bowing out of the scheme altogether.
Some equity release lenders do allow you to move into an ‘unsuitable’ property, but they will charge an early repayment fee for this, whereas if you sought to move into an approved home, they would allow you to do this for free.
What is Downsize Protection?
Downsize protection is something that was put in place to prevent homeowners from having to pay early repayment fees to move house with equity release. This generally applies to equity release consumers who are moving into lower-value homes.
Originally, these customers would incur an early repayment charge when they repaid their loan in order to move to a lower-value property. However, many lenders now allow customers to repay their loan and move home without paying an early repayment fee.
As we mentioned earlier, the property would generally have to be approved by the equity release lender, otherwise early repayment charges may apply.
Please call our 24-Hour Helpline: 0330 058 1579
Are there Conditions that Apply to Downsize Protection?
Yes, you will not always be able to downsize shortly after releasing equity. Most equity release lenders will require you to be a customer for around 5 years before you make this decision.
Another condition is one that we have already discussed, and this is that the property must be approved by the equity release provider if you want to dodge the early repayment charge.
An equity release lender will not approve a property that is lower than £70,000 in value, or is in an extremely bad condition. They may have a minimum value that they accept, as it is unlikely they will want to exchange a homeowner’s high-value property to a new property that is much lower in value.
It is also unlikely that an equity release provider would allow a homeowner to move into a leasehold property, as they may not own this for the rest of their life, and this could cause complications.
The same can be said for retirement apartments, as there are many conditions that must be met for a lender to agree to approve this type of property. For example, they may ask that the apartment is not a studio or basement flat, and that it is not a previous council-owned property.
Please call our 24-Hour Helpline: 0330 058 1579
Why Do Some People Want Downsize Protection – The Pros
Firstly, customers tend to want their equity release plan to be as flexible as possible. This reassures them that they would be supported if they ever wanted to change anything about their plan.
The alternative would be to have a rigid plan, which could result in them being unhappy with their situation and not being able to do anything about it.
Even if they don’t end up using the downsize protection, by having it there, they get to release equity without experiencing anxiety about the prospect of having to pay to move house.
Secondly, everyone wants to avoid charges where they can, and downsize protection is a guarantee that homeowners will not have to pay additional money on top of repaying their loan. This means they can remain financially stable while benefiting from the flexibility of being able to switch properties.
Finally, your situation can change quite drastically as you age, and downsize protection can reduce anxiety that homeowners have about having to move home in an emergency.
For example, if you have downsize protection and you need to move close to family to get care, or close to amenities for health reasons, you would be able to do this with ease.
Why Do Some People Not Want Downsize Protection – The Cons
Firstly, equity release customers traditionally stayed in their property for the entire duration of equity release, and many of them still do.
For this reason, some homeowners do not believe they need downsize protection, as they do not see themselves moving home. In this sense, downsize protection could be seen as pointless.
For example, some equity release consumers live in their dream property that is perfectly situated near to family and amenities, and has been adapted to make it ideal for their retirement i.e. good sized rooms, disability-friendly etc.
Secondly, not every equity release lender offers downsize protection, so it may be more time-consuming for a customer to try to find a provider with this exemption. Some customers are looking to release equity as soon as they can, so they would rather settle on one of the first lenders they see.
However, we would advise against doing this as it is vital that you are happy with your equity release plan, otherwise you may end up stuck, given that the scheme was designed to last for the rest of your life.
Finally, it can cost you to choose an equity release provider who offers downsize protection. There is no direct cost in the sense that you will not be asked to pay to have downsize protection. However, many lenders will ‘charge’ for this exemption by having higher interest rates or lower loan amounts.
Yet, if you do believe there is any chance you may end up moving house, we would argue it is definitely worth it to get downsize protection, regardless of the additional costs.
This is because it is preferable to not having downsize protection, and having to pay a large early repayment fee.
Even if you do not currently believe you will need to use downsize protection, you do not know how your situation may change. This is particularly true if you are only 55 years old or around this age, as you could have a good 30+ years with your equity release lender.
What’s more, it is possible that your preferred equity release provider will automatically provide downsize protection, so you will not have to go searching for it. This is because more and more lenders are providing this.
Please call our 24-Hour Helpline: 0330 058 1579
Can You Downsize and Keep Your Equity Release Plan?
Yes, you can most certainly downsize and keep your equity release plan if this is something you want to do. You would have to inform your lender that you wanted to move, and they would let you know if it was possible to continue with equity release.
As the new property would not be the same value, your loan amount would be adjusted to accommodate this.
For instance, if you moved into a lower value home, you would probably have to make a repayment on your loan so that the lender was not losing money through your house move.
However, you would not have to pay back the loan in full as you would be transferring your equity release plan to another property, rather than discarding it completely.
If you moved to a higher value property, you would not have to make a repayment as this would be more beneficial for the equity release lender (1).
Sometimes, homeowners in this situation get to borrow more money from the lender, and the same rules apply to this money as applies to all equity release funds i.e. it is tax-free and does not have to be repaid until the house is sold.
It is not solely the property value that would influence the loan amount adjustment, as other factors are also important, such as the property’s condition and location. However, the value is certainly the most significant factor.
When you move home and your loan amount is altered, you would also have to discuss your plan with your lender to see if anything needed to be changed. Use this opportunity to request any changes you would like to see in your plan i.e. lower interest rates, a switch from regular payments to lump sum, or the introduction of a cash reserve.
It is not guaranteed that you would be able to alter your equity release plan, but it is always wise to raise your concerns and/or desires with your lender in case they can change your plan to make it even more suitable to your new situation.
Please call our 24-Hour Helpline: 0330 058 1579
Can You Downsize and Stop Being an Equity Release Customer?
Yes, you can downsize and put an end to your equity release plan. However, to do this, you would have to be able to afford to repay the loan in full, as well as interest and any early repayment charges.
We would encourage you to carefully consider why you wanted to stop being an equity release customer, as it may just be that you are fed up with your current scheme, and there are less extreme methods to handle this.
For instance, you could switch to a new equity release plan, move house, or even try to switch to a new equity release lender. All of these suggestions would allow you to experience equity release in a different way that may be better for you.
Please also keep in mind that once you have released equity, it may be financially beneficial for you to stick with the scheme than to pay to exit it.
This is because repayments are not a part of equity release, so it is not as though you will be expected to pay back your loan while you are still alive. Instead, you can enjoy your funds for as long as you live, and the loan will be repaid when you die or enter long-term care, and the lender sells your home.
It is true that spending all of your loan can reduce the amount of funds left to your family. However, exiting equity release could leave them in an even worse position, as you will have to waste money on early repayment fees.
If you have inheritance protection for your family, there is nothing to worry about as they will get an inheritance regardless of how much of the loan you spend. However, if you don’t, you could gift some of your loan to them before you die instead of leaving an inheritance.
Another option is to stick to monthly payments or a cash reserve, and only withdraw money when you need it. Not only would this prevent you from spending all of the loan, but it would also mean you were paying less interest as interest is only charged on the money you take out.
Finally, you could switch to an interest only lifetime mortgage or a voluntary repayment plan. By paying back the interest or loan amount, you would keep your debts low, meaning your family would end up with more money at the end of the scheme.
Only consider doing this if you have the funds to do so, i.e. if you are receiving a State Pension or private pension, or if you have savings you can lean back on. If you do not have either of these things, or another source of income, we would advise against repayment plans as they can leave you in more debt.
Please call our 24-Hour Helpline: 0330 058 1579
Which Equity Release Providers Offer Downsize Protection?
Downsize protection is not one of the Equity Release Council’s standards, so you will not be able to secure downsize protection simply by choosing an equity release lender that is a member of the ERC.
However, downsize protection is becoming much more common among equity release lenders, so it should not be difficult to find a provider that offers this. According to the ERC, 63% of equity release products offered downsizing protection in January 2022 (2).
This increased from 50% in July 2021, demonstrating that this exemption is gradually becoming an accepted part of equity release.
Most lists of the best equity release companies, like this one from The Times, will tell you whether each company offers downsizing protection (3).
This can be a good starting point, but you must remember to check that your preferred plan also offers downsizing protection, as this exemption will not be a part of every single equity release arrangement offered by the lender.
It is possible that you will find an equity release company that offers downsizing protection but not many other benefits.
In this situation, we would advise you to carefully consider your priorities, as some things are more important than downsize protection for most people i.e. low-interest rates, high loan amounts, and a variety of equity release plans.
On the flip side, if you have found an excellent equity release company that does not offer downsize protection, speak to an equity release adviser about what your next steps should be. Some people release equity without downsize protection and have a great experience, but others are advised to keep searching until they find a lender that meets all their needs.
There is no shame in exploring many different lenders and asking for their stance on downsize protection. In fact, it is recommended to shop around rather than settling on the first lender and plan you encounter.
Unless you are in desperate need to release equity as quickly as possible, you could spend time researching different lenders’ attitudes to downsize protection. Be sure to make a note of whether they offer it, which plans it is compatible with, whether it is offset by high interest rates, when it can be implemented, and whether it would expire after a certain date.
Please call our 24-Hour Helpline: 0330 058 1579
How Can I Ensure I Have Downsize Protection?
All you need to do to ensure you get downsize protection is look for a lender and a plan that offers this exemption. The best way to do this is to first find a qualified equity release adviser, and ask them to help you with your search.
This is recommended anyway, as advisers are there to explain the features and risks of equity release to ensure you do not get caught up in any scams or misleading schemes. They will also help you with the practicalities of equity release, including making an application to a lender.
If you have already taken out equity without downsize protection, it will be much more difficult to secure it. You could try to get it added to your plan, or you could attempt to switch lenders, but it is not guaranteed that you would be able to get it.
Though most people do not use their equity release adviser after they receive their loan, in this situation, we would advise you to make another appointment to discuss how you would be able to move house, and whether you could avoid any fees when doing this.
What Happens If I Want to Move House and I Do Not Have Downsize Protection?
If you want to move house and you do not have downsize protection on your equity release plan, you will simply have to pay the early repayment fee. As we previously suggested, you may want to wait a few years if possible, to keep the costs low.
Sometimes, the early repayment charge will not apply after a certain period of time, so you may even be able to avoid the charge altogether.
In the meantime, there may be things you can do to make the future house move easier, such as house hunting, saving up some of your loan, and investigating to see whether you could switch your equity release lender or plan.
We recommend doing this with an equity release adviser to ensure you are assessing all of your options. Often, customers believe they are more limited by equity release than they are, and a quick consultation with an equity release adviser can help them to access the flexibility they had all along.
Please call our 24-Hour Helpline: 0330 058 1579
What Happens If I Cannot Afford My Lifetime Mortgage?
This is not something that will ever affect you as an equity release customer. You are never required to make repayments on your loan, so it is not possible for you to be unable to afford a lifetime mortgage.
However, if you have agreed to pay back a certain amount of interest each month on an interest-only lifetime mortgage and you can no longer afford it, inform your equity release lender of this.
In most cases, they will allow you to reduce your interest payments, or stop them completely, and switch to a different equity release plan. However, you will only have been accepted for this mortgage if you had a good income and credit history, so customers only end up in this position if their financial situation changes drastically.
This is less of a problem with a voluntary repayment scheme, as you are usually able to make repayments as and when you can with this mortgage, rather than having to pay a set amount in a fixed period of time. However, if you did agree on a set amount and you are struggling to commit to it, just speak to your lender about cutting back.
You will find that equity release lenders are much more flexible than traditional mortgage lenders, and this is because they know that they will get their money back from you when they sell your home at the end of the scheme.
This means they will not chase you for money, as they do not need you to make any repayments in order for them to benefit from the scheme. In fact, in some cases, they discourage you from repaying, as you will have seen in our explanation of early repayment charges.
Please call our 24-Hour Helpline: 0330 058 1579
What Happens If I Do Not Want to Move House After Releasing Equity?
If you do not want to move home after you have taken out equity, you do not have to. In fact, equity release lenders tend to prefer for you to do this, as the scheme works best when you stick to the initial plan and stay in your property until you die or move into a care facility.
After taking out a lifetime mortgage or having a home reversion, you are free to stay in your property for as long as you want. Unless you specifically request to move home, you will in fact be expected to remain in that property and keep it as your primary property.
If you are a lifetime mortgage customer, you will be living in your property as the homeowner (as well as any one else you own the home with – usually a partner).
However, if you have a home reversion, though you will stay in the property, you will not be the homeowner. This is because you have to sell your property (or a large share of it) to an equity release provider in order to receive a home reversion loan.
Get a Free Equity Release Consultation
Please get in touch with Equity Release Warehouse for a free consultation about equity release. In this appointment, we can explain what downsize protection is in more detail, as well as helping you to find a lender and a plan that offers this.
We will not force you to seek downsize protection, as we know not everyone is keen on this. If you are set on not getting it, we will focus on other aspects of equity release to find out what you want to get out of the scheme.
Some examples of other guarantees you can have are: a no negative equity guarantee, inheritance protection, and a guarantee that you will be able to remain in your property for as long as you like.
As you can see, equity release is very flexible, and there are many additions you can put on your equity release plan to tailor your arrangement to your personal situation.
If you seek an equity release lender that is a member of the ERC, most of these guarantees will be automatically available to you, so this is a great way of ensuring your plan is as flexible as possible.
This is because the ERC imposes standards on all of its members, which includes requiring them to offer fixed or capped interest rates, penalty-free payments, and a no negative equity guarantee (4).
If you are curious about how other aspects of equity release work, including interest, inheritance, and repayments, have a look at our help centre. We aim to convey to our customers exactly how equity release works, including the positive and negative impacts it can have.
However, without a consultation, you will never know how equity release would affect you specifically.
This is because our advisers are equity release specialists, and they will ask questions about your finances, marital status, age, and property to discover which equity release plan would suit you the most, and what the consequences of taking out a lifetime mortgage or having a home reversion would be for you.
All you need to do to get a consultation is leave your details here, and one of our advisers will get in touch with you to help you start your journey, or to simply explain equity release with zero obligation for you to make a commitment.
You can also call us on 0330 058 1579 from 8am-8pm Monday to Sunday.
References
[1] Can I Move House if I Take Out an Equity Release Plan? https://www.equityreleasecouncil.com/what-is-equity-release/faq/what-happens-if-i-have-an-equity-release-plan-and-need-to-move-into-long-term-care/
[2] Equity release customers draw 7+ years pension income from homes https://www.equityreleasecouncil.com/news/pandemic-property-boom-sees-equity-release-customers-draw-more-than-seven-years-of-income-from-their-homes/
[3] Best equity release companies https://www.thetimes.co.uk/money-mentor/article/best-equity-release-companies/
[4] Our Standards https://www.equityreleasecouncil.com/about/standards/
