Equity Release vs Downsizing Your Home – Pros and Cons

If you are considering Equity Release you may be wondering what options you have and whether downsizing would be preferable. Releasing equity from your property can be a challenging decision to make and you will need professional advice before undertaking Equity Release.

The truth is that both Equity Release and downsizing have unique advantages and disadvantages and when compared to one another, it should make your choice a little easier. There is no one size fits all solution and for some, Equity Release will be a clear winner and others downsizing will be the best outcome.

Let’s explore Equity Release and downsizing and give you the information you need to narrow down your decision.

What is Equity Release?

In its simplest form, Equity Release is a specialised mortgage product that allows you to borrow money against the equity you hold in your property whilst you reside in it. It differs from a traditional mortgage as you will not be able to mortgage the majority of Equity you hold in the property, and you will not make monthly mortgage payments. Instead, if you decide not to make monthly payments, the interest on the Equity Release accumulates over time and the loan is paid when you pass away or go into long term care.

A common method to settle an Equity Release mortgage is for the lender to sell the property once you pass away or move into long-term care. Because of this, they will lend up to a fixed percentage of your equity, with the remaining equity being used to cover the interest on the loan if you do not make any payments yourself.

An alternative method to settle the Equity Release is for your beneficiaries to refinance the property once they inherit it or to sell it themselves. For example, you may be able to borrow 50% of the equity tied up in your property and the remaining 50% is security for the lender to cover accumulated interest on the loan.

There are two types of Equity Release available in the UK:

• Lifetime Mortgages
• Home Reversion Plans

Lifetime Mortgages

Lifetime Mortgages are by far the most popular form of Equity Release in the UK, accounting for over 90% of all Equity Release products taken each year. They typically offer better value for money compared to Home Reversion Plans (although this is dependent on the type of product lenders offer).

With a Lifetime Mortgage you borrow money against your property’s equity and interest can compound on the loan. To prevent interest from compounding, you can service the interest – which is often done monthly or annually. You can even overpay the mortgage to clear the capital by up to 10% of the initial advance per annum with most lenders without incurring early repayment charges. When you pass away or go into long term care a lender will call in the loan and in most cases the property is sold by the lender to repay the mortgage.

You should have the right to reside in your home until you die or require long term care with most Lifetime Mortgages. There are some lenders who don’t operate as transparently as others, and you should seek out an Equity Release provider who is registered with the Equity Release Council.

You can discover more about the Equity Release Council in the section detailing them and their code of conduct below.

Home Reversion Plans

Home Reversion Plans are a less common form of Equity Release although they may be more suitable for you than a Lifetime Mortgage depending on your personal circumstances. With a Home Reversion Plan a lender will purchase the equity from you up front (often far below market rate) and allow you to reside in the property until you pass away or go into long term care.

Unlike a Lifetime Mortgage there is no interest on a Home Reversion Plan as the equity is purchased up front by the provider. It is still considered a mortgage product as a Home Reversion Provider will enter an agreement with you to allow you to live in the property and sell it when you die or move into long term care.

Home Reversion Plan providers make their money by selling the property at market value which incentivises them to offer as little as possible on a plan to maximise their profit margin. For example, if your property is worth £200,000 and you sell a Home Reversion Plan provider 50% of your equity, you shouldn’t expect £100,000. In fact, it is common for you to be offered £50,000 or less in this example for the 50% share in your equity.

Equity Release Council

Equity Release can be a confusing product and it can also be used by malicious providers to exploit vulnerable elderly people. For this reason, the Equity Release Council was set up to create a self-regulated aspect for the Equity Release industry.

According to the Equity Release Council, 90% of all Equity Release providers and brokers are registered with them and meet their standards of conduct. Unfortunately, that means one out of every ten Equity Release providers or brokers are offering products and services that don’t necessarily meet these high standards.

The Equity Release Council standards are:

• Members of the Council agree to give advice that is fair and easy to understand. Outlining positive and negative aspects of an Equity Release product
• No-Negative Equity guarantee on all products, which means you will not owe more than the total property value at the end of the mortgage
• Consumers have the right to choose their own legal advice if they wish to
• All providers must be registered and authorised by the FCA to offer additional protection to consumers in the event a complaint needs to be raised
• The ability for consumers to port their Equity Release product subject to lender requirements
• The right to reside in the property until death or long-term care is required

As you can appreciate, these safeguards are designed to make your Equity Release as fair and transparent as possible. Providers who make up the 10% not registered with the Equity Release Council do not have to follow these standards which can often result in subpar products and advice being offered.

To summarise, always seek out a provider or Equity Release broker who is a member of the Equity Release Council.

Benefits of Equity Release

Equity Release can be a lifeline for those wanting to keep and use their home but free up cash tied up in the equity of the property. Money is paid as a tax-free lumpsum and can be used on whatever you choose to spend it on, as long as it is for legal means.

When compared to downsizing, Equity Release has a few distinct advantages:

• You don’t need to give up your home and lifestyle by moving to a smaller property
• You won’t need to pay the costs associated with downsizing like Stamp Duty
• You won’t need to go through the stress of property searching, moving, and redecorating

Some brokers charge advice fees for their services. If you want to avoid these fees you should use Boon Brokers. Boon Brokers offer FREE, no obligation mortgage advice.

Drawbacks of Equity Release

There are of course a few drawbacks to Equity Release. In most cases the property is sold when you pass away or go into long term care and the amount your estate receives might not be substantial (if there is any money left at all). This is assuming that you do not make monthly interest-only mortgage payments.

You will also find both Lifetime Mortgages and Home Reversion Plans can offer poor value for money when you consider the totality of the product. This is especially the case with Home Reversion Plans where providers often offer substantially lower than market value. There is a process that needs to be followed when taking an Equity Release product and there are costs associated with releasing equity.

Will My Property Always be Sold?

A common misconception is your property will always be sold when you pass away or go into long term care by a provider. This is not default position of a provider and first they will ask the executor if the estate has enough to cover the loan. Even if the estate doesn’t have adequate funds, providers will accept the loan be settled by next of kin. Your next of kin may opt to repay the loan and retain the property.

In short, a lender doesn’t automatically sell a property and there is a process they follow which involves consulting your next of kin and estate before deciding how they recoup the loan.

What is Downsizing?

Downsizing is moving from your existing property to a new property of lower value. By doing this you free up the difference in value. For example, if you sell an unencumbered property for £300,000 and purchase a property for £150,000 you will realise £150,000 from the process.

Benefits of Downsizing Compared to Equity Release

Downsizing has a few key advantages over Equity Release.

• You receive market value for your property and free up cash at the same time
• You are free of any mortgage agreements and don’t need to worry about interest accumulating (assuming that there is no mortgage on the new purchase)
• Your next of kin will inherit the new property and you can gift money from the funds you have freed up by selling your existing property if you wish
• Your next of kin will inherit the new property and you can gift money from the funds you have freed up by selling your existing property if you wish

Drawbacks of Downsizing Compared to Equity Release

Downsizing can be problematic in several ways though and this can make Equity Release a more attractive prospect in comparison. When you downsize you will need to consider the fees and expenses associated with moving. This ranges from stamp duty liabilities to conveyancing fees and home-moving costs.

You will also need to consider your location. Downsizing often entails moving out of your current area and it can be daunting for older people to assimilate into new communities. Unfortunately, downsizing can lead to isolation, especially if property values in your current area do not allow you to downsize and free up the money you need.

Lastly, you should consider how well you cope with stress. Buying and selling a property is always stressful for one reason or another and it can be difficult to cope if you are older or vulnerable.

Which Should I Choose – Equity Release or Downsizing?

This decision is entirely yours to make. An Equity Release broker will be able to guide and advise you on which option is best for your circumstances but ultimately you will need to take the option you are most comfortable with.

Remember to select a broker who has membership with the Equity Release Council (ERC) as they provide fair and impartial advice. Brokers who choose not to meet the high standards laid out by the Equity Release Council will often provide advice that falls short and may not be in your interests.

It is a significant decision to make. Both downsizing and Equity Release will have a long-term impact on the remainder of your life, and it could be the most important choice you ever make.

When you discuss your circumstances with an ERC Equity Release broker, they will outline all aspects of the product including any pitfalls you may not have considered. They will also advise you if Equity Release is not a suitable product for you.

Get the Right Advice

It’s essential to get the right advice and that’s where we come in. We are proud members of the Equity Release Council, authorised and regulated by the FCA to provide Equity Release advice.

We operate on a fee-free basis, whereby we receive commission from your most suitable lender on completion of the case and no fee will be charged to you at any stage of the process. Equity Release advice is given with no obligation to proceed to help you make an informed decision without associated broker costs.

Contact us today by filling in our request a callback form and we can discuss whether taking Equity Release or downsizing is the right choice for you.