For many homeowners, your home is your greatest asset. It’s a place that over the years, has built up a lifetime of memories, and may have built equity. People may be considering to unlock the value of their home to help fund later life plans.
There are several ways homeowners can choose to unlock some of the equity in their home. Two of these options are downsizing your home to a lower value property or releasing the equity in the form of tax-free cash via equity release. In this article we look at downsizing and equity release and what they are.
It is important to not that you should seek independent advice before considering any options detailed in this article.
What is equity?
Home equity is the amount that your property is worth, minus the amount that is left to pay off on your mortgage, and any other loans secured against your property.
As house prices increase and decrease, so can the equity in your home. You can read more on home equity, along with how to calculate your home equity in our related guide by clicking here.
What is equity release?
Equity release allows eligible UK homeowners aged 55 and over to unlock some of the value held in their property in the form of tax-free cash.
The most popular type of equity release is a Lifetime Mortgage. This allows homeowners to release tax-free cash from their home as either a lump sum or via a drawdown plan. A lifetime mortgage lump sum allows homeowners to unlock their cash in one go. A lifetime mortgage drawdown allows homeowners to access funds as and when needed via a drawdown facility.
Benefits of equity release
- With equity release, you have the right to remain in your property, with no monthly payments being required.
- Where a product is approved by the Equity Release Council, you will never owe more than the value of your home due to their ‘no negative equity guarantee’
- Equity release comes with features such as inheritance protection, which allows homeowners to ring fence a portion of their property, which will be passed down to their loved ones upon the sale of their home
Considerations
- The interest charged on a lifetime mortgage is typically higher than that of a traditional mortgage, therefore the interest can build quickly on top of the value of the original loan.
- A lifetime mortgage is a loan secured against your property, meaning the amount you owe can grow quickly.
- Equity release can affect any state benefits you’re entitled to.
- If you choose to repay all or part of the loan early there may be an Early Repayment Charge (ERC)
What is downsizing?
Downsizing occurs when homeowners purchase and move into a property of lower value. When the home is sold, and after any fees are paid on both the previous and new property, the remaining lump sum or ‘the difference’ is free to be used by the homeowner.
Downsizing is also good for those who are looking to move into a more accessible property, move closer to family, or simply have a change of scenery.
Benefits of downsizing
- Downsizing is a debt free way of accessing some of the cash tied up in your home.
- You may be able to find a property which is more accessible such as a bungalow.
- In some cases, you may find your household bills are cheaper in a new property, especially when moving from an older, larger property to a smaller one or perhaps period property, into a new build.
Considerations when downsizing
- Consider the costs when moving, items such as estate agents fees, legal fees, stamp duty and moving costs. It is important to take these costs into consideration when considering you finances during the move.
- Downsizing could mean leaving behind the place you’ve grown up in, potentially leaving behind neighbours and friends that you may have known for years.
- Downsizing can be a physical task and may be difficult for those with poor health in later life.
Alternatives to Equity Release and Downsizing
There are several alternatives to consider if you are looking to raise additional funds in later life.
Downsizing is one option we have mentioned, where you sell your current home and move to a smaller, less expensive property, freeing up cash in the process.
Renting out a room or property can provide a steady income stream.
If you’re of pension age, you might be able to take advantage of pension drawdowns or annuities.
Another option could be to take out a secured loan or mortgage, although this would require making regular repayments.
You can also look at government benefits or grants that may be available for certain individuals, particularly those with low incomes or specific needs.
Whatever you consider, it is important to carefully consider all options and seek professional advice before making any decision.
Important to note
- A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly
- Equity release will reduce the value of your estate
- Equity release may leave you with limited or no property equity remaining
- Equity release may affect your entitlement to means-tested benefits
- Equity release will reduce your financial options in the future
Let's discuss your options
If you would like to discuss your later life options further you can give us a call on 0800 043 0725 or complete the simple form below.
Think carefully before securing other debts against your home, you should be aware that you may be extending the terms of your debt and increasing the total amount that you repay.
How to know when you’re ready to downsize
When it comes to equity release, we would always recommend seeking advice from an independent later life adviser.
This is because the adviser will be able to help you understand every aspect of your personal circumstances. Weighing up all your options and providing you with key guidance to support your objectives. This may be doing nothing or indeed looking at other options open to you. The decision is always yours.
Seek Independent Advice
If you are a retired persons contemplating fundraising from their property. You must recognise the significance of seeking independent advice. To help navigate this complex financial landscape effectively.
Whether considering downsizing, equity release, renting out property, or considering one of the other alternatives to equity release. Retired people like you must weigh the benefits and risks of each option in light of their individual circumstances and goals.
Independent advisers play a crucial role in providing retirees like you with the expertise, perspective, and guidance. Providing you with the balanced and unbiased information needed to help you make informed decisions, and help you secure your financial well-being in retirement.
By leveraging independent advice, you can confidently navigate the process of raising funds from your property. But there are no guarantees that you will be able to do so. Everything is subject to your personal circumstances.
