Downsizing v Equity Release Plan

Homeowners hoping to release money from their property are faced with a difficult decision: downsizing or equity release. Downsizing - moving to a house of lesser value to free up cash - has probably been the more traditional method to do this. However, equity release schemes are becoming increasingly popular with people who want to release equity, but stay in their homes.

From a purely financial perspective, downsizing can seem like the clear choice. Selling up and moving to a cheaper property releases the equity in the home (minus any mortgage owing), providing a lump sum, usually to provide extra income in retirement. The new home remains an asset which can then go on to provide a financial legacy to the family.

With downsizing, however, It is important to factor in the not insignificant costs associated with moving. Valuation fees, estate agents fees, legal fees, stamp duty and moving costs will all come off the equity released during the sale. Perhaps more of a consideration with downsizing, is the emotional aspect. Moving away from the family home and well known neigbours could provide too much of an emotional wrench for some and make them consider the alternatives.

Entering into an equity release scheme is one way to release the money tied up in your property, whilst staying in your home. Many equity release providers offer an online equity release calculator which help estimate the potential amount which could be released. Broadly, there are two types of equity release scheme: the lifetime mortgage and the home reversion scheme.

As the name suggests, the lifetime mortgage involves taking a loan out against your home for which you are charged interest. When the property is finally sold, the loan plus interest is repaid. The downside with this form of equity release is that the interest rates involved tend to by high, typically in the region of 7%, meaning that the original loan can almost double over a period of ten years. There is the strong possibility that there will be very little left, once the home is sold and the loan and interest repaid.

A home reversion plan is an equity release scheme which does not carry this risk. With a home reversion plan, a percentage share of your home is sold (usually, it must be said, at less than the current market value). When the home is sold, the home reversion company receive the same percentage of the proceeds and no more.

Deciding on which option is right for you is no easy task and not one that should be taken lightly. Experts recommend both keeping the family informed of your intentions and using an independent financial advisor.