Equity release vs downsizing

Chris Torney / 09 December 2016

How does equity release compare with downsizing?



Rising house prices and falls in the level of income produced by pensions has led many older people to turn to the value locked up in their homes to shore up their finances in retirement.

The majority of people who have owned property in the UK for at least a decade are likely to be in possession of large amounts of equity, especially if they have paid off their mortgages.

There are two main ways for older people to turn this equity into extra cash in retirement: through an equity release scheme or by downsizing to a cheaper home. So how do these two alternatives compare?

What is equity release?

Family home ties

One of the biggest advantages of equity release is that you get to raise money without leaving your family home. 

If you opt to downsize, you may not even be able to find a suitable property near where you currently live. 

And while your current home may be larger than you strictly need if your children have left home, it does mean you have space to accommodate them and their potentially growing families when they come to visit.

Equity release and moving house

Upfront costs

Moving home comes with numerous extra costs, which can eat into the money you can release by downsizing. Your estate agent’s and solicitor’s fees, plus the likes of surveys, removals and stamp duty expenses can add up to many thousands of pounds.

There are, however, likely to be initial costs associated with equity release: you may have to pay your financial adviser as well as set-up fees on the plan you take out. The Equity Release Council says total charges can be between £2,000 and £3,000.

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How much money you can generate

The amount of capital you can generate from equity release and downsizing depends on a number of factors. With equity release, the main considerations are the value of your property and your age – the more valuable your home and the older you are, the more you’ll be able to release.

With downsizing, you need to look at the difference between your home’s current value and the cost of the property you’d like to move to – minus the cost of moving.

All these factors can vary significantly, so you need to do your sums carefully before you decide.

Equity release: How much could you get

Long-term costs

Once you’ve downsized, you shouldn’t face any further costs related to your decision and you should eventually be able to leave your new, cheaper home to your family as an inheritance.

With equity release, however, costs can mount: if you have a lifetime mortgage, interest rolls up over the life of the plan and can severely reduce what you are able to leave as an inheritance.

With a home reversion scheme, the provider will have the right to a fixed share of the proceeds from the sale of your home (or the cash equivalent) when you die or move into long-term care.

Ultimately, equity release will probably work out as the more expensive option because you are effectively paying for the right to release the value in your property while staying in your home. You – and perhaps also your family – need to decide whether this is an acceptable trade-off. However, if your overall happiness is tied up with staying put, then equity release might worth considering.  

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The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.