Newspaper articles and television reports frequently advise readers to always weigh their options before releasing equity because there may be undiscovered financial solutions. One of these which has created much debate recently is the possibility of downsizing.
The benefits of downsizing are covered in this article, along with how equity release plans can still be very helpful in certain circumstances.
Downsizing can be an attractive option for many retirees, especially those looking to free up some cash or move to a more manageable property. But what if you don’t want to sell your home? Equity release could be the answer
Equity Release: An Alternative to Downsizing
Equity release allows you to access the value tied up in your home without having to sell it. You can then use this money to downsize, renovate your current home or simply enjoy a more comfortable retirement.
Downsizing with Equity Release: How It Works
Here’s how downsizing with equity release might work:
- Release Equity from Your Home: You take out an equity release plan and release a portion of your home’s value as a tax-free lump sum.
- Purchase a Smaller Property: Use the released funds to purchase a smaller, more manageable property.
- Repay the Equity Release Plan: The loan amount and accrued interest are repaid when you sell your new home or when you pass away.
Benefits of Downsizing with Equity Release
- Stay in Your Community: You can remain in your familiar surroundings and maintain your existing social network.
- No Moving Costs: You avoid the costs associated with selling your home and moving to a new one.
- Improve Your Home: You can use the released funds to renovate your current home, making it more comfortable and accessible as you age.
- Financial Flexibility: You have access to a lump sum of cash that you can use for various purposes, such as paying off debts, covering unexpected expenses, or simply enjoying a more comfortable lifestyle.
Considerations for Downsizing with Equity Release
- Loan Repayment: Remember, equity release is a loan that needs to be repaid. The interest on the loan will accumulate over time, increasing the total amount you owe.
- Inheritance: Equity release will reduce the amount of inheritance you leave behind for your beneficiaries.
- Impact on Benefits: Depending on your circumstances, equity release could affect your entitlement to certain benefits.
Talking to an Advisor
It’s crucial to speak with a licensed financial advisor before deciding to downsize with equity release. They can assist you in weighing the advantages and disadvantages of each option and determining whether it is appropriate for your particular situation.
Retirees who wish to access their home’s value without selling it may find that downsizing with equity release is a feasible option. But before choosing a choice, it’s imperative to thoroughly weigh the ramifications and consult an expert.
Equity Release versus Downsizing
Selling one property at a higher value than the one you want to move into is the practice of downsizing. Therefore, the equity generated from the price differential can be used to support you financially during retirement. This is usually the main reason for people deciding against taking equity release.
Downsizing is fine in principle, and it is one of the options Equity Release Supermarket advisers always discuss with clients. However, for economic and personal reasons, the idea of downsizing can be impractical.
Equity Release Case Study – How downsizing works in principle
Consider Peter and Clare, who are both 73 years old and have lived in their £275,000 semi-detached home for more than 30 years. They have made the area their home, their family and friends live nearby, and they feel safe and at ease where they are right now.
Regretfully, they still owe £100,000 on their mortgage, which the lender has informed them they must pay off by the time they turn 75. Like many people in their situation, they do not have the money set aside to do so. Since their family is also having difficulty making ends meet, they are unable to assist!
So what are their options?
- They could put their house up for sale, pay off the mortgage, and hunt for a less expensive one. After deducting moving expenses, this would entail looking at homes priced at approximately £165,000. Regretfully, there aren’t any properties with this kind of value in the area; even smaller properties would still set them back about £200,000.
- Consider a remortgage with another lender. This would involve switching their £100,000 mortgage to another lender. But the majority of high street banks
Since this would be their final relocation, it would appear that their only choice would be to relocate even farther away to a place they would not feel comfortable in. Making the right choice now will determine how happy they are in retirement. The pair experiences worry and stress because they will be leaving their circle of friends and family behind and moving to an unfamiliar place that might end up being unpopular and undesirable.
As a result, only option 1 is practical. However, there is still the problem that the property might not be totally adequate for their needs going forward.
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FAQ
What is the downside of equity release?
How much do you lose on equity release?
Can I move house if I have equity release?
Should you downsize or equity release your home?
Downsize or equity release: What’s right for you? If you’re looking to access the equity in your home and free up money to spend on something important – like your retirement – two of the options you could choose from are downsizing or equity release.
Should you downsize or release your home?
If you’re looking to access the equity in your home and free up money to spend on something important – like your retirement – two of the options you could choose from are downsizing or equity release. If you’re a UK homeowner aged 55 or over, equity release is a way of unlocking some of the cash from the value of your home without having to move.
How much capital can you generate from equity release and downsizing?
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.
Is equity release a good way to release money?
Also known as a lifetime mortgage, equity release is way for homeowners over 55 to release money from their property. Photo: Toby Melville/Reuters Equity release can be a great way to release cash from your home but the pros and cons need to be carefully weighed up.