Downsize or equity release: What’s right for you?

Two different ways you can unlock money from 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. 

Equity release – the basics

If you’re a UK homeowner aged 55 or over, equity release is a way of unlocking cash from the value of your home without having to move. It’s a big financial commitment, so it’s important to understand what it would mean for you and your family.

There are two main types of equity release: a lifetime mortgage and a home reversion plan. We only offer a lifetime mortgage and in this article we explore how that option stacks up against downsizing, which is a different way of releasing money from your home.

What is a lifetime mortgage?

A lifetime mortgage is a type of equity release available if you’re a UK homeowner aged 55 or over. It’s basically a long-term loan secured on your home. It’s normally repaid by selling your property when you (and your partner if you have a joint lifetime mortgage) die or go into long-term care, depending on the lender’s terms and conditions. Until then, your home is still legally yours.

Downsizing explained

Downsizing simply means selling your current home to buy one that’s normally cheaper, maybe because it’s smaller or in a different area. Once you’ve sold your current home and paid all the costs, any money left over is yours. Your new property legally belongs to you, and you can say in your will what happens to it when you die.

Equity release vs downsizing

When you’re weighing up if getting a lifetime mortgage or downsizing would be better for you, think about your situation and goals. 

Downsizing

Deciding if downsizing is the right path for you depends on your particular circumstances and what you’re hoping to get out of it. Here are some things to think about:

There's this... But what about that...

Downsizing might mean moving out of an area you’ve been comfily settled in for years and going somewhere new. You could be tearing yourself away from friends and family or waving goodbye to a home that’s stuffed full of memories.

But maybe a fresh start somewhere different, with new friends to make and activities to dive into, is exactly what you want. Or picking up your life might give you the opportunity to drop it closer to loved ones.
Your current home could be perfect for you and your needs. For example, it’s got just the right amount of space for you to really stretch out in. Downsizing might mean you’d have to compromise on things like this. Of course, the opposite could be true and you’re rattling around in an empty house with more space than you need. Moving to a smaller home could also help you spend less, for example, with lower energy bills and lower maintenance costs. You could also pick a more future-proof type of home, like a bungalow or flat.
Downsizing normally involves buying a cheaper home, maybe because it’s smaller or in a different area. But shrinking how much your home is worth could mean there’s less to leave behind in the inheritance pot for loved ones. If you don’t want your loved ones to wait until you’re gone, you could give them the money you release by downsizing. Though you’ll need to check the rules around gifting money.
Downsizing could mean a smaller mortgage, or no mortgage at all. And lower monthly expenses mean you could fill up your piggy bank with that extra money or spend it on something else.  Downsizing comes with a few initial expenses. The costs of downsizing are the normal ones associated with selling and buying a home, like legal fees and stamp duty. You might also have to spend some cash to give your new home a lick of paint or a sparkling new bathroom if it needs a little work.

Lifetime mortgage

Deciding if equity release is the right path for you depends on your particular circumstances and what you’re hoping to get out of it. Lifetime mortgages have eligibility requirements, and the amount you can borrow will depend on several things, including your age and the value of your property.

Remember, a lifetime mortgage is designed to last until you (and your partner if you have a joint lifetime mortgage) die or need to go into long-term care.

Here are some other things to think about:

There's this... But what about that...
With a lifetime mortgage, you can unlock money from your home without needing to move. This means you don’t have to leave a home you love or potentially rip yourself away from an area you know or from loved ones close by. If adventures somewhere new are exactly what you’re looking for, or you want to scoot closer to loved ones, then a lifetime mortgage might not be the best option for you.
The money you unlock from your home using a lifetime mortgage is tax free, and with most lenders you can choose both how and when to receive it. You could take it as one single lump sum. Or, with us and other lenders, you can choose to take a smaller lump sum, and the remaining amount can be left in a cash reserve to be taken in bite-size chunks whenever you need. You can spend the money on whatever you want. With a lifetime mortgage, the amount you owe can quickly increase because lenders will add interest each year onto both your loan and any interest previously added.

Plus, equity release can impact your tax position and if you can get certain means-tested benefits.
If your lender is a member of the Equity Release Council (which we are) then you’ll get a ‘no negative equity’ guarantee. This means you’ll never need to pay back more than the value of your home, so long as it’s sold for the best price that’s reasonably possible to get. So, your loved ones won’t be lumped with debt linked to your equity release. There are initial costs involved in arranging a lifetime mortgage, such as set up fees and legal costs. How much it costs depends on different factors, like who your provider is, what they charge for and how much those fees are. Plus, you’ll need to get financial advice, which you may have to pay for, before you can proceed. Find out more about the costs of equity release.
If you want to help your loved ones now, before you’re gone, you could give them the money you unlock from your property value using equity release. Though you’ll need to check the rules around gifting money if this is something you’re thinking about doing. Having a lifetime mortgage will chip away at the amount of inheritance your loved ones could get. So if you’re looking to leave something behind for them when you’re gone, you’ll want to investigate this.

With us, when you take out a lifetime mortgage you have the option to add an inheritance guarantee, which means you can save a percentage of your home’s sale price to leave as inheritance (subject to terms and conditions). You may also be able to get similar inheritance protection options with other lenders.
Choosing equity release doesn’t mean you’re stuck in your current home forever. If you decide you want to move in the future, you might be able to take your lifetime mortgage with you to the new property, depending on your lender’s criteria. Things like moving an existing lifetime mortgage to a new property will vary from lender to lender. So it’s important to check exactly what their requirements and limitations are. 
Some lenders offer downsizing protection. And if this is something you’re interested in, you’ll need to check their individual requirements. With us, if you want to move home and your new property doesn’t meet our lending criteria at the time, you may be able to repay your lifetime mortgage with no early repayment charge. To benefit from this downsizing protection, you’ll need to have had your lifetime mortgage for three or more years. If you want to pay off all or part of your lifetime mortgage and interest early, depending on the circumstances and your lender, you could face a chunky early repayment charge.

Getting advice 

When deciding if equity release or downsizing is right for you, make sure you gather all the facts first. Both are a big financial commitment and understanding what they mean for you and your family is important.

With equity release, before you’re able to go ahead, you’ll need to speak to a financial adviser who'll take you through everything you need to know, including the costs and risks, and all the options open to you. You don’t need to do this if you’re looking to downsize, but it’s something you might want to consider.

If you want to explore the idea of equity release further, you can find out more about our lifetime mortgage.

Or call us on 0800 092 7903 to find out if you're eligible for an Aviva lifetime mortgage or to book an appointment. Your call will be answered by a financial advice firm that specialises in equity release and has been specially selected by us to provide information and advice on our lifetime mortgage. They’re authorised and regulated by the Financial Conduct Authority.

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