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Equity release or downsize?

If you have equity tied up in your home, you could unlock some of it through equity release or by downsizing. Here we briefly compare the two options.

To release equity or downsize. That is the question

In this article, we briefly compare two popular ways of using the value of your home to access money – downsizing and equity release.

For many positive reasons, most notably advances in medical science, both men and women are living much longer these days. While that’s great news, it also presents its own challenges such as gaps in the job market, pressure on health and social services as well as funding for public services and social housing.

So, if retirement is on the cards, it could be worth asking yourself a couple of questions: firstly, when you retire, will you have enough money to live happily? And secondly, will your income in retirement be enough to live on comfortably for the rest of your life? If not, the home you live in may be able to help.

Release equity: Model house with chart showing rising property values

Free up the value in your home

If you've owned a property for many years and paid off much, if not all, of your mortgage already, you could use some of the money locked up in your property to boost your finances.

There are two main ways to convert some of the value of your home into cash:

Downsizing

Simply selling your home, buying a cheaper property – either smaller or in a lower priced area – and pocketing the cash left over once all costs have been paid

Equity release

A financial arrangement that can provide a tax-free lump sum, a regular income or both, while still living in the comfort of your current home. The equity release provider is repaid when your home is sold; typically when you die or move out permanently into long-term care

There are two main types of equity release. A lifetime mortgage that is secured against your home and a home reversion plan that involves you selling part or all of your home.

As you would expect, there are pros and cons of releasing equity by either method and both require some level of compromise. Here are some of the main things to consider when weighing up your options.

Why downsize?

Selling up and moving to a cheaper property is quite straightforward from a financial point of view. You sell your house at today’s market value and buy a cheaper one. Once all the costs of moving are settled, you pocket the money left over to help fund your lifestyle and needs.

Your new property will be 100% owned by you and when you're gone, it can be left to your loved ones as an inheritance.

A smaller or newer property could be more economical to run, with lower energy bills and lower maintenance costs. And if you're finding it more difficult to get around or want to be prepared for whatever the future may throw at you, moving to a more practical property, like a bungalow or flat, could make sense.

You may want to move to be nearer family or find it refreshing to start a new phase of life in a different area or in a totally different style of property.

Downsizing: 3 houses on a riverbank ranging for big to small

The downsides of downsizing

Where some see starting over as a fresh opportunity, for others it could be too much of a wrench. If that's how you feel, you're not alone. In one recent study it was found that of the 11.4 million over-55s in the UK, just 3.3 million were considering downsizing in the future.

Depending on the amount of cash you need, you might have to move to a cheaper area as well as into a smaller property, which may be too much change all at once.

Moving can be expensive. As well as the purchase price of your new home, estate agent fees, legal fees, removals and possibly stamp duty, will need to be factored in to the numbers. You may also have to spend money on improving your new home to make it how you would like it. A recent report found that that new homeowners spend an average of £10,743 on additional, essential costs such as buying furniture and upgrading their homes within the first five years of buying.

If you've lived in your home for many years, the emotional upheaval of selling up may be hard to contemplate, especially if it has been the family home. Add to that, the hassle and stress of a move and it may feel like too much of an ordeal.

Downsizing: Back view of a couple standing in front of boxes

Moving to a smaller property could mean parting with some of your treasured possessions as you won’t have room for them anymore. And when family come to visit, will you have enough space for them to stay?

Finally, moving to a different area could mean leaving behind the support of family and friends currently on your doorstep, which can become even more important as you get older.

Why equity release?

If you’d much rather stay in your home then equity release could be a good option. This type of plan allows homeowners from the age of 55 to access some of the value tied up in their home without having to move or make monthly repayments.

The cash you receive is tax free and how you spend the money released is entirely up to you. You could clear debts, pay for one-off big expenses like home improvements or use it as a regular income boost to help you live a little more comfortably every day. Or, you could use some of it as a living inheritance and help your loved ones out financially right when they need it, rather than at an unknown point in the future when the need may have long passed.

Staying in your home: Family photos clustered on a wall

You don’t have to repay the money (or the interest on a lifetime mortgage) until you die or move permanently into long-term residential care, so once you have paid the set up and advice fees, an equity release plan won’t push up your monthly outgoings.

Some lifetime mortgages offer flexible options to suit your circumstances, such as a drawdown facility. This lets you take money out of your home only when you need it, rather than having to take a lump sum all at once.

You also have the reassurance of the Equity Release Council’s ‘no negative equity guarantee’. This makes it impossible for you, or your family, to be left owing any money to the lifetime mortgage lender once your home is sold, even if it sells for less than the total amount needing to be repaid.

Equity release: Sold sign outside traditional English home

The downsides of equity release

An equity release scheme is usually repaid from the proceeds of the sale of your home, so you can’t pass on the property itself as an inheritance. And even if you only release a small amount of the equity in your home, this will still reduce how much your estate is worth.

You can’t get hold of 100% of the equity in your home. How much you can get will depend on the value of your property, your age and your state of health among other things.

With a home reversion plan, you sell all or some of your home to the plan provider at a discounted price and neither you, nor your family, will benefit from any future rises in house prices on the portion you sold.

Alternatively, with a lifetime mortgage, interest can mount up quickly, so the longer you have the loan, the more will need to be repaid when the property is finally sold.

As with any financial product, there are costs involved in arranging an equity release plan, such as set up fees, legal costs and fees for the required financial advice. These costs will ultimately depend on the amount released and the type of plan you choose.

Equity release adviser speaking to a mature couple

Always get an expert’s view

Downsizing or using equity release to access the money tied up in your home is a big decision needing careful consideration. It’s a decision that’s likely to impact your family too, so it’s important to include them in your plans.

There may be other ways you could access similar amounts of money. As with any major financial decision, before doing anything you must speak to a qualified specialist who will take you through all the options available to you in detail.

SunLife offers a range of straightforward and affordable products including over 50s life insurance, funeral plans, life insurance, pet insurance, home insurance, car insurance, ISAs and Will writing services

Here's the information that you need to know about who we are and the other companies that we work with in order to provide our products and services.

Who are SunLife? 

Phoenix Life Limited trades as SunLife and is the provider of the Guaranteed Over 50 Plan, SunLife Insurance and the life insurance policy payment option for Funeral Plans. Phoenix Life Limited’s registered office is at 1 Wythall Green Way, Wythall, Birmingham, B47 6WG (registered in England, no. 1016269). Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is entered on the Financial Services Register (registration no. 110418). As part of SunLife’s commitment to quality service and security, telephone calls may be recorded.

SunLife Limited distributes financial products and services and is a company limited by shares, registered office: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG (registered in England, no. 05460862). SunLife Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (registration no. 769427).

You can contact us by post at SunLife, PO Box 1395, Peterborough, PE2 2TR or by phone on 0800 008 6060.

If you choose to add Funeral Benefit Option to your Guaranteed Over 50 Plan the funeral services are arranged and provided by Dignity Funerals Limited. Dignity Funerals Limited is a company registered in England and Wales No. 00041598. VAT registered No. 486 6081 14. 4 King Edwards Court, King Edwards Square, Sutton Coldfield, West Midlands, B73 6AP. Telephone No. 0121 354 1557. Fax No. 0121 355 808. Part of Dignity plc. A British Company. Dignity are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority but are registered providers with the Funeral Planning Authority.

Who provides the Funeral Plans?

The funeral services are arranged by a funeral director selected by Golden Charter Ltd. Golden Charter Ltd are not required to be authorised or regulated by the Financial Conduct Authority or the Prudential Regulation Authority in relation to funeral plans but are registered providers with the Funeral Planning Authority.

If you choose to pay for your funeral in one go, with a single payment, you will have a contract with Golden Charter. The funeral services will be arranged by a funeral director selected by Golden Charter Ltd.

If you choose to pay for your funeral with a life insurance policy, the policy will be provided by Phoenix Life Limited, trading as SunLife. The funeral services will be arranged by a funeral director selected by Golden Charter Ltd.

Who provides My Smarter (ISA)?

My Smarter (ISA) is provided by Scottish Friendly Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority. Details can be found on the Financial Services register, registration No. 188832. Member of The Investment Association. Registered Office: Scottish Friendly House, 16 Blythswood Square, Glasgow G2 4HJ.

Who provides the Will writing services?

Hugh James is authorised and regulated by the Solicitors Regulation Authority (SRA Number:303202).

The information contained on this website is based on Hugh James' understanding of the law of intestacy in England and Wales only as at April 2014. The law in Scotland and Northern Ireland is significantly different. This is for information purposes and is not intended to be legal advice.

Who provides Family Life Insurance?

SunLife Family Life Insurance is provided by Scottish Friendly Assurance Society Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Details can be found on the Financial Services register (registration number 110002). Registered Office: Scottish Friendly House, 16 Blythswood Square, Glasgow G2 4HJ. 

Who provides SunLife Pet Insurance

SunLife Pet Insurance is arranged and administered by BDML Connect Limited. BDML Connect Limited is authorised and regulated by the Financial Conduct Authority (No. 309140). Registered in England and Wales Number 02785540. Registered Office: 45 Westerham Road, Bessels Green, Sevenoaks, Kent, TN13 2QB.

Who provides SunLife Home Insurance

SunLife Home Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.

Who provides SunLife Car Insurance

SunLife Car Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.