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With poor-performing pensions and annuities, many people are now looking to release their hard-earned money tied up in their property. But is equity release a good option vs downsizing?

Both equity release and downsizing have their benefits and drawbacks. Equity release could provide you with the tax-free cash you require, but you will be charged interest over the plan's lifetime. However, it allows you to remain in your home, and you only need to repay it when you pass away or move into long-term care.

Before deciding whether you should do one or the other, it is essential you know all the benefits and shortfalls of equity release and downsizing.

Let's thoroughly compare both options, as there may be some surprising factors you should consider.

Can you take equity release instead of downsizing?

You can take equity release instead of downsizing, and it is one of the most common alternatives.

It is so popular because it allows you to remain in your home for as long as you wish without making monthly payments - unless you want to.

You can spend the tax-free cash on anything you wish. The most common reason is to clear an existing mortgage, many of which are interest-only plans coming to an end of term. However, with interest rate increases in the conventional mortgage world and rising living costs, many are looking to repay their mortgages early.

Unlike standard mortgages, there is no term to equity release. Instead, you don't have to repay the balance until the last borrower passes away or moves into long-term care - but you can repay at any time you like.

What are the benefits of equity release vs downsizing?

There are many benefits to using equity release to access the money tied up in your home instead of downsizing.

The benefits of Equity Release vs Downsizing include:

  • Benefiting from future house price growth
  • Having no moving costs
  • Staying in your familiar family home
  • Avoiding the stress of moving

Let's take a look at these in greater detail.

Benefiting from future house price growth

This is a surprising but essential thing to consider.

House price growth will impact the whole property, not only the amount left after you release equity. In recent years, we have seen an average property price increase in the UK of 3% per year.

Based on this, a £400,000 property will be worth £537,567 after ten years - an increase of £137,567.

Whereas a £300,000 property will be worth £403,174, an increase of £103,174.

In this scenario, you will have profited £34,393 by remaining in your home instead of downsizing.

Of course, it's important to remember that you will be charged interest on the amount you release from your home.

At age 70, a release amount of £100,000 would come at a headline interest rate of 5.50%. After ten years, this £100,00 increases to £173,095.

There are also moving costs, Stamp Duty Land Tax, and estate agent fees to factor in if you downsize too.

As you can see, downsizing will have been more cost-effective, but not by the margin you may have expected. Other factors could impact the cost comparison, such as existing mortgage interest rates and whether you decide to make payments towards the plan.

No moving costs

Moving home can cost tens of thousands of pounds, including:

  • Estate agent fees
  • Stamp Duty Land Tax (SDLT)
  • Conveyancing fees
  • Removal costs

Equity release does have set-up costs, but not nearly as high as moving. Typically, you will find them to be between £1,000 and £3,000, which include:

  • Your financial advice fee - varies depending on the firm.
  • Your legal fee - varies depending on the firm. We recommend Barton Law, who charges £840 on a no-completion, no-fee basis.
  • The lender's product fee - varies from £0 to £995 but is typically only paid on completion.

At Money Release, we only charge £840 on a no-completion, no-fee basis. You will find this to be highly competitive, with the average being £1,495. To find out more information on how much equity release advisors charge, click here.

Remember, the costs associated with moving are payable up-front. Therefore, it can take many years for interest charged on an equity release to be more expensive than downsizing.

Your equity release advisor will be able to complete all of these calculations before you make any decision. Click here to book an appointment in one of our qualified advisors' diaries.

Staying in your familiar family home

You may be able to relate to some of our clients, having lived in their homes for over 30 years and cannot imagine being anywhere else.

Home comfort can become increasingly important as you age, and moving everything you own into another house can seem daunting.

Depending on where you live in the UK, downsizing might mean moving away from your family and friends to afford a suitable property.

Equity release allows you to remain in your home for as long as you wish, but you could take the plan to the new property even if you want to move. We refer to this as porting; I will go into this in more detail later in this guide.

Avoiding the stress of moving

Do not forget, when you move, you may have to:

  • Be part of a long chain, not knowing the moving date for months or even over a year
  • Organise new bills
  • Organise the removal of your belongings
  • Speak with solicitors for the conveyancing of your property
  • Speak with estate agents for the sale of your property and the purchase of a new one

At Money Release, we do our best to make the process as stress-free as possible. One of our recent clients said:

We were very nervous when we decided to take the plunge into equity release as it’s such a huge step. However with the truly professional and patient support of Joe we found the whole process so smooth and easy. There was never a time when we felt anxious and any concerns were addressed quickly and most importantly, in plain English.

Once paperwork was completed our case was handed over to Carol who continued the process in the same professional and smooth manner right through to completion keeping us informed every step of the way.

Our grateful thanks to both.

What are the downsides of equity release vs downsizing?

One of the main downsides of equity release compared to downsizing is the interest charged against the plan.

The downsides of Equity Release vs Downsizing include the following:

  • Interest Charged
  • You may be able to get more money from downsizing
  • Repaying your equity release

Let's take a look at these in greater detail.

Interest Charged

This does not significantly impact you assuming you remain in the property. Instead, it is the impact on your estate that needs consideration.

The plan will end When the last borrower passes away or moves into long-term care. The initial loan amount plus any interest charged must be repaid to the lender.

The rest of the money in the property and any other assets you own will be passed onto your beneficiaries (perhaps family) in line with your Will.

As part of our Fact Finding process, we will discuss the impact with you and understand your thoughts towards leaving an inheritance. This ensures we can create a plan which meets your financial needs and goals now and in the future.

I suggest discussing your equity release plans with your beneficiaries as part of the process. This will ensure there are no surprises when the plan ends.

Another downside of equity release compared to downsizing is that you are limited in the amount you can release.

You may be able to get more money from downsizing

The lender largely bases the amount you can release on your age and property value. Typically, the older you are, the more money you can release as a percentage of your home, known as a "Loan to Value"(LTV).

The amount you can free up from downsizing depends on your current property price and the cost of the new property, which could be significantly higher than the equity release.

However, equity release products on the market allow people to release up to 55.00% of their property value. Based on a property worth £500,000, this equates to £275,000.

Use our calculator to find out how much you could release against your home; it takes seconds with no personal details required.

Lastly, I want to discuss how the plan could affect you in the future if you no longer want or need it.

Repaying your equity release

If, after some time, you wish to repay your equity release, you could incur an Early Repayment Charge (ERC).

These are structured in different ways depending on your specific plan; however, most ERC structures last for 8, 10, or 15 years.

As time passes, the ERC will typically become lower. For example, the ERC might be 5% in the first five years and 3% in the next five years.

However, there are many protections against ERCs built within plans. We will take a look at these later in this guide.

If you have any plans to repay your equity release, discuss it with your adviser, and they will be able to help you best.

How to decide between equity release and downsizing

Deciding whether to equity release or downsize can be challenging, and it may impact you for years to come.

You should consider things such as:

  • Financial goals
  • Impact on your estate
  • Whether you wish to remain in your home
  • Whether the new property will meet your needs now and in later life

I suggest speaking with a qualified equity release adviser if you are unsure. They will complete a "Fact Finding" exercise to find out more about you.

Following a Fact Find, they will recommend a way forwards. This could be downsizing, or they may present a Key Facts Illustration (KFI) from a lender. A KFI is a 17-section document that details exactly how the plan works and provides information on how much it will cost you over the estimated term.

The adviser can use this information to distinguish whether equity release or moving home is cost-effective and meets your financial goals, all free of charge.

Important: A Money Release adviser will never recommend equity release unless they believe it is the best solution for you.

I also recommend speaking with your family and friends, as typically, these people know you best.

You don't necessarily need to go into your financial position with them, but it could be worth discussing how moving home and potentially area could work for you.

If I take equity release can I downsize in the future?

If you take equity release, you can downsize in the future. You could opt to take the plan with you to the new property, known as porting. If you port your plan, the new property must meet lending criteria at the time. Alternatively, you could repay the equity release in full when you move, but you could incur an Early Repayment Charge.

Downsizing may not be suitable for you now, but it could be in the future.

The equity release council approves every product we recommend. One of their requirements is that the lender must allow you to port the equity release to a new property.

The process is broadly similar to taking equity release in the first place. Depending on the lender, you may need further financial advice, which we can provide. You must also have a valuation of the new property.

The construction and features of your new property will need to meet the lending criteria of your plan.

If you are porting as part of downsizing, the lender may request that you pay back some of the monies to them. For example, suppose you borrowed 30% of your current property and were moving to a property half the price. The lender will likely ask you to repay half the funds in that case.

This should be fine, though, as you will have the sale proceeds of your current house available.

We have written a guide dedicated to transferring your equity release to a new property which you can read here.

If you do not wish to port the plan, you have the option to repay it instead.

The lenders can offer two main protections if you want to repay your equity release early.

  • Downsizing protection
  • Significant Life Event exemption

There are two types of downsizing protection.

The one offered by most plans states: If, after several years, most commonly three or five, you decide to move home, you can repay the balance in full without incurring an Early Repayment Charge if the new property does not meet lending criteria.

However, the more comprehensive type works the same way, regardless of whether or not the new property meets lending criteria.

This can be an excellent tool for financial planning if you want to downsize in the future.

The significant life event exemption is a feature that allows you to repay the balance in full, without incurring an Early Repayment Charge, within three years of the first borrower passing away or moving into long-term care.

No one knows how they will feel when their loved one passes away, but I know many people prefer to move home.

This exemption can offer great protection to allow the surviving applicant to move home without restriction, repaying the equity release as part of the process.

Important: If you have plans to repay your equity release before the last borrower has passed away, discuss it with your adviser.

Using equity release when downsizing your home

So far, we have looked at equity release vs downsizing - but how about both simultaneously?

If you wish to downsize but need extra funds to purchase the new property, you could use an equity release similar to a standard mortgage.

The property sale and new property purchase are completed at the same time.

Cash from your current property and the equity you release from the new home will give you enough to purchase the new property.

We have written an article on "using equity release to purchase a new property", which you can read here.

You can also downsize now and use equity release in the future.

This can be helpful if you have enough cash to purchase the new property but wish to have further funds, perhaps to help throughout retirement.

Requiring an income top-up is very common since pensions and annuities have performed poorly.

If you have further questions, why not speak with one of our qualified advisors?

Call us on 0207 158 0881 or use our online form to book your FREE consultation.

While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor legal advice and should not be relied upon.

To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.