How can you unlock the value tied up in your property? You may be looking for ways to fund retirement. Or, you may want to fund some home improvements. Below, our Burnley financial advisers discuss two options: downsizing and equity release.
This guide outlines the main pros and cons of each approach and some situations where they might be suitable. We also include our reasons why both options are not typically ideal as a “Plan A” for retirement funding.
We hope this information is helpful. To discuss your financial goals and situation with a financial adviser, please contact us to arrange a free, no-commitment consultation.
Downsizing & equity release – what are they?
Downsizing is relatively straightforward. Here, the idea is to sell your existing property and use the proceeds to buy a smaller and cheaper home. The leftover funds can then be used towards other areas of your financial plan, such as boosting your pension.
Equity release is different. It is a financial product that lets you access the equity (value) tied up in your home without needing to sell or move out.
The two main types of equity release are the “lifetime mortgage” and the “home reversion plan”. Lifetime mortgages are more common. Here, the homeowner borrows money secured against their home. The loan and accrued interest are later repaid when the property is sold, typically when the owner dies.
A home reversion plan involves selling part (or all) of your home to a provider in exchange for a lump sum or regular payments. You can keep living in the property without paying rent, but you will no longer be the sole shareholder.
Pros & cons of downsizing
One powerful benefit of downsizing is that it frees up a significant amount of cash relatively quickly. Moving forward, you may also find it cheaper to run your new home due to lower maintenance, heating and council tax costs.
Downsizing can bring a lot of peace of mind and financial freedom. It does not involve paying interest or taking out a loan. A smaller property can also mean less upkeep, freeing up more time and making life more manageable for people in retirement.
However, many people will find it emotionally difficult to relocate. Moving house is also not cheap. There are removal expenses, estate agent fees and perhaps taxes like stamp duty to pay. The average cost of moving house is currently £8,885.66.
Downsizing also brings less space for hobbies, family visits or storage. Market risks may be involved with moving (e.g. it may be difficult to find a buyer). You must also be prepared for the disruption, stress and time commitment of selling, buying and moving.
Evaluating equity release
The main benefit of both equity release options (lifetime mortgage and home reversion plan) is that you can stay in your home. This can have great emotional appeal and involves minimal lifestyle disruption.
Monthly repayments are not involved (unless chosen). Equity release products also come in many forms, giving you lots of flexibility – e.g. lump sums or a drawdown facility to access funds as needed. The UK’s equity release industry is highly regulated by the FCA, giving consumers lots of protection.
Notwithstanding, equity release carries some risks and drawbacks. Firstly, it can reduce your ability to pass on a meaningful inheritance to your loved ones. Releasing equity reduces your estate left for heirs, and this may not align with your goals.
Releasing equity can have knock-on effects, such as your eligibility for means-tested benefits like Pension Credit or Council Tax Reduction. Equity release can also involve high up-front costs, such as arrangement fees, valuation fees and legal fees. There is also the possibility of your home falling in value in the future, which might not cover the full debt (although most plans come with a “no negative equity guarantee” to guard against this).
Deciding on a plan
There is no “right” answer when deciding between downsizing and equity release. So much depends on your unique financial goals and circumstances. For instance, do you want to maximise inheritance or prioritise immediate cash flow?
Another key consideration is whether you want to stay in your current home or are open to downsizing. Family members may need to be involved in the discussion. There may also be immediate financial considerations (e.g. the cost of moving).
Hopefully, you can see that both options involve trade-offs and risks. For this reason, it is usually best not to rely on downsizing or equity release for your retirement plan if you can avoid them. Rather, they can be useful backup plans if your Plan A does not go accordingly (e.g. due to care costs after deteriorating health).
Instead, using pensions, ISAs and other tax-efficient “vehicles” are typically a better financial “front line” for retirement. When combined with a strong State Pension income, these options can allow you to stay in your home, preserve an inheritance for your loved ones, and retain full property ownership.
None of this is to say that equity release and downsizing are undesirable. There are certainly cases where clients in Burnley will benefit from using them. Rather, it is our experience as financial advisers that clients tend to thrive when they feel they do not need to sacrifice anything in their homes as they age.
If you want to ensure you’re taking the right steps to safeguard your financial future, please get in touch. We’d love to discuss your goals with you!
