For the majority of homeowners, their property is their greatest asset. If you have owned a property for ten years or more or already paid off your mortgage, you have most likely accumulated a large amount of equity. So it makes sense that many people look to use the equity that is tied up in our homes in later life to help fund our lifestyle choices and retirement years.
There are two ways that you can unlock the equity in your home:
● You can downsize to a cheaper property.
● Alternatively, you can choose an equity release.
Which option you choose will depend on what is suitable for your situation. Both have their advantages and disadvantages that need to be weighed up when making this important choice. For example, if you choose to downsize, you’ll be able to take your hard-earned cash and be debt-free; however, this could mean moving away from a much-loved family home. On the other hand, equity release allows you to stay where you are but will affect how much inheritance you leave your family.
It’s a big decision to make. We’ve put together this article to help you explore the pros and cons and to help you think about what is important to you so that you can make the right decision for your circumstances:
The equity in your home is the market value of your property today minus any mortgage you have against it.
For example, if your home is valued at £400,000, but you have £75,000 left to pay on the mortgage, your equity will be £325,000. To release that money, you have two choices. Downsize to a cheaper, often smaller property or release equity in your home.
In England, there are two main ways to release equity from your property. These are through lifetime mortgages and home reversion plans. We’ll explain both briefly here:
Once you reach 55, you can apply to take out a loan against your home. Lifetime mortgages will either pay you a lump sum or several smaller payments, known as a drawdown. This is an excellent option if you do not know precisely what you need, as you only pay interest on the amount of equity you withdraw via the lifetime mortgage. You can also take out an interest-only lifetime mortgage (often referred to as a retirement interest-only mortgage – RIO for short), retain ownership of the property, and the balance will be paid either when you die or when you go into long-term care. The balance is usually repaid using proceeds of the house sale. The amount you can borrow will depend on both your age and the value of your property.
Lifetime mortgages are by far the most popular way to release equity from a family home. However, a second option to consider is a home reversion plan.
With these plans, you would not retain ownership of your home. Instead, you sell the total value or a percentage thereof to a specialist firm, and in return, you will receive a lump sum or regular payments, or a combination of both. Although you may no longer own your home, you are granted a ‘lease for life’, meaning you can continue to live in your property until you die or go into long term care. The amount owed is repaid after the property has been sold, and anything left is repaid to you or your estate.
Downsizing means just that, selling your family home and moving to a cheaper property. The benefits are that after the costs of moving you’ll be debt-free and have the cash you generated from selling your family home to live off or use as you please.
Which option is best for me? Only you can decide what is best for you and your circumstances, below we’ve listed some of the pros and cons of both options to help you weigh them up.
Downsizing means you can access the cash in your property debt free. You’ll own 100% of the property you downsized to and you can leave it to your family as inheritance.
There are other benefits to moving to a smaller property, you can think about what will suit you later in life and purchase a property that is accessible and easy to maintain. In addition, your household bills could be cheaper reducing the overall cost of living.
The costs associated with moving home can be high and they will affect the amount of money you were hoping to free up. You’ll need to take into account the costs of:
● Estate agent fees
● Stamp duty
● Moving costs
The average cost of moving house in the UK is over £10,000 or just under £25,000 if your move is within London. In addition, there are additional costs of any home improvements needed and purchasing new furniture.
You’ll also want to consider what moving house means to you. You’ll be leaving behind a neighbourhood, friends and neighbours you have built relationships with over the years. For some it can be deeply upsetting to leave the family home.
When you release equity you receive a tax-free lump sum that you can use however you want. It may simply be to give you a retirement income or you might use the cash to make improvements to your home, including making it more accessible. Equity release can make the later years of life a little easier.
If you choose a lifetime mortgage you do not need to make any monthly repayments, unless you choose a scheme that allows you to make regular payments against the interest. You will still own your property and when you sell you will still benefit from any increase in house prices in your neighbourhood.
The majority of lifetime mortgages are provided by companies that are members of the Equity Release Council. They offer a no negative equity guarantee which ensures you will never owe more than the value of your home.
If you opt for a home reversion plan, where you sell all or part of your property for a lump sum you are entitled to live in your property rent-free for life. There are no added interest charges and you can still leave an inheritance.
If you find yourself in a position to pay off the equity early, hefty charges are often applied.
With home reversion plans, you will no longer own your home or part of it. This means that you or your family will not benefit from any increases in the property market when it becomes time to sell. The home reversion company will pay a value lower than the market value.
The equity released could affect any pension or benefits you have, including savings credits and council tax benefits.
Choosing to release equity or downsize your home is a big decision. If you are considering either option, you should speak to an expert and look at all options available to you.
Consider how much money you need and for what purpose? What are the options are available to raise funds, what are your close friends and families thoughts? Do you want to stay where you are or start a new adventure somewhere else? Is it practical for you to continue living in your property as you get older, or will it need adapting? A financial advisor will be able to give you advice on all of the above so it isn’t a decision you should make alone.
By taking the time to explore your options and fully understand the implications, you can make an informed decision.