Downsizing or Equity Release in 2022

Is It Better to Downsize OR Release Equity in 2022?
Contributors: Nicola Date, Katherine Read. Reviewed by Francis Hui
Are You Wondering Whether to Release Equity or Downsize to Access Much Needed Cash in Retirement? Both Options Have Fantastic Benefits but Which Is Better? Read on to Find Out the Pros & Cons of Each & Which Will Work Best for You.

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Are you wondering which is a better option, downsizing or equity release?

Without this crucial information, you could end up paying 1000’s of hard-earned pounds to downsize!

Sounds absurd? Well, it’s not.

When claiming your share of the over £2bn in equity that’s already been released in 2021, you MUST read the fine print.

Otherwise, when you want to downsize at a later stage, you could be trapped in your big old house.

If you’ve already unlocked equity and now have decided to take a step in a new direction, we’ve got a secret to share.

What You’ll Learn in This Article:

    Could Downsizing While Having an Equity Release Plan Cost Your Life Savings?

    Find out now!

    What Are the Pros & Cons of Downsizing?

    The main pro of downsizing is that you access the full value of your property.

    The main con of downsizing is that it can be an extremely exhausting process.

    More pros and cons of downsizing include:

    Downsizing Pros

    • You can buy your new home cash and benefit from the left-over cash.
    • You can move to a more desirable neighbourhood or closer to your adult children and grandchildren.
    • Your new home can be easier to navigate when you get older. For example, you could select a property without stairs.
    • It’s a chance to reduce all the clutter and start fresh.
    • You can benefit from selling some of your old furniture that fits into the larger space.
    • You can find a home that suits your current taste.
    • A smaller and potentially newer home means fewer maintenance costs.

    Downsizing Cons

    • There are various costs involved with moving house.
    • Purging can be totally exhausting.
    • Leaving your life-long home can be emotionally exhausting, especially when you’re older.
    • You’ll have less space to keep your special things.
    • You may have to get rid of precious furniture and collectables to move into your new home.
    • Your energy bills are likely to be less.
    • If you’re used to entertaining guests, you likely won’t have space to do so in your new home.
    • Your access to means-tested benefits could be impacted.

    What Are the Pros &Cons of Equity Release?

    The main pro of equity release is that you can remain in your home, despite unlocking its value.

    The biggest con of equity release is that you won’t access the full value of your estate.

    More pros and cons of equity release include:

    Equity Release Pros

    • The money you unlock is tax-free.
    • There’s no obligation to make any repayments in your lifetime.
    • You can live in your home, rent-free.
    • The money can be used in any way you wish.
    • Equity release interest rates are fixed for life.
    • The ‘no negative equity guarantee’ ensures that any debt beyond the sale price of your home is written off.
    • The Equity Release Council regulates the industry.

    Equity Release Cons

    • You can only access between 20% and 60% of your property value.
    • Compound interest can quickly increase the amount owed.
    • Your inheritance will be drastically reduced.
    • If you end your plan early, you could incur early repayment charges.
    • Your access to means-tested benefits could be impacted.
    • There are costs involved with equity release.
    • You likely won’t be able to take another loan against your home.

    What’s Right for Me?

    You should also consider the personal and social ramifications of downsizing or releasing equity from your existing property.

    Friends & Family

    When it comes to downsizing, adjusting to a new location might be difficult since you may not know anyone.

    It’s also possible to move closer to family or loved ones.

    However, with equity release, you stay put. This is great if your family is close by, but it could be challenging if they’ve moved away.

    Leaving an Inheritance

    If you buy a smaller home, it may be worth less than your current residence.

    This implies that when you pass away, the sale of your property will leave a lesser inheritance for your family.

    You and your family can use the money from downsizing to purchase a new house, renovate it, or even downsize to avoid selling your current home.

    Equity release will reduce the inheritance you give due to the compound interest.

    You’ll want to familiarise yourself with tax rules regarding donations and inheritance taxes if you’re thinking about giving money away to family members or a cause you’re passionate about.

    Your Current Property

    If your home is already suitable for retirement and not too big, then downsizing may be a pointless exercise.

    Furthermore, you’ll need to get a property valuation to see if there are cheaper properties on the market.

    If you release equity, a smaller home may not be suitable for accommodating grandchild sleepovers and family visiting from abroad.

    In addition, you’ll need to consider if you’re ready for a lifestyle change.

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    Can I Downsize with Equity Release?

    Yes, you can downsize with equity release, as long as the new property is approved by your lender, giving you the chance to port your plan. This is thanks to downsizing protection.

    However, if the new home is not approved, you may need to pay back your equity release, sometimes incurring early repayment charges.

    Downsizing Repayment Charge Exemption

    The biggest fear when it comes to equity release is being tied into an agreement that you can’t escape.

    This is more relevant than ever. Due to financial struggles caused by Covid-191, 1.8m retirees in the UK are looking to move to smaller homes.

    25% of these within the next 12 months, 54% within the next 2 years, and 21% at a later stage in life.

    Great news!

    You won’t be restricted if you have the right lifetime mortgage.

    You could maintain your plan while moving into a smaller home, OR pay it off without incurring any penalties.

    Equity Release Councils Regulations & Downsizing

    Over the years, lifetime mortgages have evolved and have become more flexible and cost-effective.

    Upon the formation of the Equity Release Council, what was once the wild west of financial products, is now a fully regulated market.

    The implementation of the council has brought about products like downsizing protection3.

    If your new home meets the proper criteria, you could transfer your current plan.

    In addition, there are options to downsize and pay back your equity release plan in full.

    You can do so for 2 reasons:

    • If you no longer want to carry your equity release to your new home.
    • If your new home does not meet the criteria of your plan provider.

    The great news is that 45% of equity-release products now come with downsizing protection.

    In general, it’ll be available to you after the first 5 years of taking out your loan.

    The Benefits Of Downsizing Protection

    Here are the 3 benefits of this fantastic tool:

    • You can pay off your equity release with the balance of your home’s sale value without incurring extra costs that could be crippling.
    • You have the option to move due to unforeseen circumstances.
    • You can use the money saved for upkeep on your new home or new furniture or appliances.

    Common Questions

    How Do I Know if My Old Plan Has Downsizing Protection?

    Is Downsizing Worth the Fuss?

    How Will I Know if My Potential Plan Has Downsizing Protection?

    In Conclusion

    Both equity release and downsizing have pros and cons, but the one you select will depend on your circumstances.

    Your best bet is to book an appointment with a financial adviser that specialises in retirement products.

    They will help you determine the best course of action for you and your loved ones and help you decide between downsizing or equity release.

    Before You Go…

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