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Should I downsize or release equity?

View profile for Zoe Fellows
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Downsizing and equity release are effective ways to fund your plans for later life, or to help a loved one onto the property ladder.  They both have their pros and cons and the right option for you will depend on your own personal situation.  Zoe Fellows, Associate Solicitor and Equity Release specialist, explains here why equity release may be right for you, and why more people are choosing this option opposed to downsizing.

“The equity release market certainly has seen a growth in the last year, with the products becoming safer and more protection in place for consumers,” explains Zoe.  “Current equity release rates are also at a record low of 4.91%, with over half of products offering a rate of 5% or less and a fifth offering as low as 4% of below.  23% of homeowners used equity release in the last six months of 2018, a figure that is growing each year as 40% of homeowners state they are likely to turn to equity release in the future.  It seems to be that the main reason why equity release is preferred to downsizing is so that people can stay in their own homes.  In fact, 85% of those surveyed in recent research state that they would prefer to stay in their own homes; a figure that has risen by 3% in the past year.”

What are the options for equity release?

There are two main plans available for equity release, with the lifetime mortgage being most popular, particularly amongst those who wish to release equity to stay in the familiarity and comfort of their own home.  Under a lifetime mortgage, you would retain full legal ownership of your home and you borrow against the value of your home, meaning it remains a part of your estate which you can pass on to your children.  Under this type of plan, there are no monthly repayments; the interest is added to the loan and paid at the end of the loan, which is either when you pass away or move into long-term care.

Under a home reversion plan, you would sell a portion of your property to a private company and receive either a lump sum or an income.  While this could mean a reduction in the Inheritance Tax payable upon your death as the size of your estate has reduced, you will no longer remain the legal owner of the property.

Deciding whether downsizing or equity release is the best option for you will depend on a number of factors, including, but not limited to:

  • The size and value of your current property
  • How much you are looking to release
  • How cash rich you are
  • Your age
  • The other assets you have
  • The reason you are looking for an injection of funds
  • How quickly you require these funds

While downsizing may look to be a viable alternative as it can lead to reduced living costs, you should consider the other associated costs with moving, such as Stamp Duty Land Tax, estate agent fees and other general moving costs, which will take their part of the profit you make from selling.  It is also important to carry out a general review of house prices in your area and the buoyancy of the property market.

“All of these factors will determine whether equity release will see the return you are looking for or whether downsizing will, which is why we would always advise you have the conversation with legal and financial advisors before making any decisions,” concludes Zoe.  “The rise in popularity of equity release could be that the current economic and political climate is making people nervous about moving, or it could be that more people are seeing the benefits of equity release.  Either way, this decision will be one of the most important ones you make and having the right advice from qualified and experienced professionals will guide you as to the best option for you, your family and your future.”

If you are considering equity release and would like more information, you can contact Zoe on 01329 288121 or email zoefellows@warnergoodman.co.uk.  Alternatively, you may also find the following resources useful:

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article