Is Equity Release Better than Downsizing?

With over £4.8bn of property wealth released by homeowners in 2021, the equity release industry is more popular than ever. At the same time, more than 4-million retirees plan to downsize to cover costs. 

The reality in the UK is that many retirees are looking for the means to fund their lifestyle, to avoid working long into their later years. 

The big question is, is equity release a better option than downsizing? John Lawson, equity release expert from SovereignBoss, will explore the topic in the following report. 

What Is a Good Pension Pot?

With the current state pension sitting at £9,339 per year, most retirees don’t have the financial means to live a good life unless they make alternative arrangements. Living a basic retired life in the UK will usually cost one a minimum of £10,200 a year, so a good pension pot is anything better than that.

But, retirees deserve to thrive and experience their dreams after a long and sometimes challenging life. Fortunately, 74% of UK retirees own homes, and they can use their property wealth to fund later life. 

The two most popular uses of property wealth are through equity release or downsizing, but which is better?

What Is the Difference Between the Two?

The key difference between equity release and downsizing is that with the former, you get to stay in your property, but with the latter, you will need to move out. You see, with downsizing, you’ll pack up your home and move to a smaller or cheaper property. Whereas with equity release, you’ll use your property wealth but remain at home.

What is Equity Release?

In essence, equity release is a loan against your primary residence, allowing you to unlock tax-free cash in the form of a lump sum, into a drawdown facility, or as a monthly salary. While voluntary loan and interest repayments are welcome, they are not compulsory. Instead, the loan and compound interest are repaid when the last homeowner passes on or requires moving into a care facility.

Both options have fantastic benefits, but there are also downsides that you’ll need to consider

What Are the Pros & Cons of Equity Release?

The biggest pro of equity release is that you get to stay in your beloved family home, and the downside is that there are costs involved. Here are some more pros and cons:

Equity Release Pros

• The money released is tax-free.
• No repayments are required during your lifetime.
• You can stay at home without the hassle of having to pack up and move.
• Equity release is safe as the Equity Release Council regulates it.
• You can keep aside a portion of your property as an inheritance.

Equity Release Cons

• There are costs involved with equity release.
• If you don’t repay the interest, it will compound.
• You have a chance of drastically reducing your inheritance.
• You won’t benefit from your full property value due to interest.

What Are the Pros & Cons of Downsizing?

The best thing about downsizing is that you don’t have to worry about the expense of maintaining a large property, but it can be stressful for retirees. here are some more pros and cons:

Downsizing Pros

• You can sort through years of clutter and have the opportunity to live in a fresh, clean space.
• You can benefit from your full property value.
• Your children can still inherit a home from you when you pass away.
• You no longer have to worry about the expenses of running a large household and the maintenance of an old property.

Downsizing Cons

• Moving from your beloved family home can be heartbreaking and stressful, especially during retirement years.
• You may no longer have space to accommodate visiting grandchildren and family members.
• You may have to sell some of your cherished furniture that won’t fit into the new space.
• Moving home is an expensive exercise,

So, is Equity Release Better?

Yes and no. Equity release is often better because homeowners don’t need to move out of their comfortable space. But some may want to reduce the size of their property and worry less about maintenance costs; therefore, downsizing can be better in such situations.

Whether or not equity release is better for you is purely dependent on your circumstances. Our advice is to contact a whole market financial advisor who can talk you through all your retirement options. Equity Release Council member, Nationwide, is a great place to start. 

In Conclusion

whether you’re up for equity release or downsizing, using your property wealth is the perfect way to fund your retirement dreams. Just be mindful to think carefully before making any final decisions and chat with your family and financial advisor. After all, you don’t want to downsize or release equity only to regret it later.