Downsizing vs. equity release: the pros and cons

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For many people, their home is their most valuable asset. While it is good to have a valuable property, it can also leave homeowners in the situation where they would like to access some of the money tied up in their home to fund them into their retirement.

In this situation, homeowners have two main options. They can either choose to downsize by selling their property and buying a less expensive home, or they can opt for equity release. Equity release comes in two forms: the lifetime mortgage and the home reversion plan.

A lifetime mortgage involves taking out a mortgage secured with your property. A home reversion plan involves selling all or part of your home in return for regular payments or a lump sum.

Both downsizing and equity release have a range of potential benefits and drawbacks depending on the specifics of your circumstances and what you are looking for. In this blog, we look the pros and cons of downsizing and equity release to help you understand which one might be right for you.

The pros and cons of downsizing

Downsizing is the process of selling a large expensive property and buying a cheaper (and usually smaller) one, using the difference to fund your lifestyle or for any other spending.

There are a number of advantages here. The first is that as the income comes from your main home, you don’t need to pay any tax. So, you keep every penny of the difference between your old property and your new one. Additionally, as the money is entirely yours, there is no limit to what you can spend it on.

You also get the double benefit of downsizing that you will likely reduce your household bills. The home may also be more suitable for your lifestyle in later life.

However, downsizing does come with a couple of potential issues and challenges. The first is the stress and inconvenience of moving home. Moving home is one of the most stressful experiences for anyone, and this is especially true when you are moving from the property that has been your family home for many years.

It is also worth noting that downsizing incurs the natural costs of buying and selling properties. These come in the form of stamp duty, solicitors’ fees and moving costs – these will eat into the amount of money you take from the downsizing of your home.

The pros and cons of equity release

Probably the major advantage of equity release is that you get to stay in your home for as long as possible. Many people will have strong emotional attachment to their home; equity release allows you to hold onto it while still accessing some of its value.

Just as with selling your main property, equity release is tax-free so you will get all of the money that is owed to you via the scheme. This tax-free money can be used however you like; from funding your lifestyle, to making repairs and upgrades to the home.

Equity release will generally be a cheaper option for you than downsizing. There are no costs relating to issues such as stamp duty or conveyancing.

However, it is also important to understand that there are some trade-offs with equity release. Taking money from your home will naturally reduce the level of inheritance you have to give when you pass away.

It is also true that if you decide at any point that you want to pay off the equity release to functionally buy back the property, there are expensive early repayment fees.

How to decide between equity release and downsizing

What is perhaps most important to say is that it is vital that you should take advice on the best course of action for you. At John Whyte Equity Release, we provide professional and impartial advice relating to equity release. Get in contact with us today for more details.

To understand the features and risks of a lifetime mortgage, please ask for a personalised illustration.