Equity release vs downsizing house – which is best?

Have you built up considerable equity in your home that you’d like to spend but don’t know how to unlock? Two ways of accessing the cash under your roof are to downsize or use equity release.

Both are popular options among older homeowners. The average lump sum borrowed using an equity release mortgage exceeded £115,000 in the last three months of 2024 according to industry body the Equity Release Council. Meanwhile, moving experts Reallymoving.com have recorded that the average sum freed up by moving to a smaller, cheaper home so far this year is £134,405.

But which is the best option?

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In this guide, MoneyWeek walks you through the benefits and drawbacks of each so you can decide whether moving to a smaller home or taking out equity release is right for you.

What is equity release?

If you are a homeowner aged 55 or over you can take out a specialist type of finance called equity release.

The agreement ends, or the debt is repaid from the sale of your home when the last surviving homeowner dies or moves into long-term care. You don’t have to make any monthly repayments making it an affordable option in retirement.

What are lifetime mortgages?

A lifetime mortgage is the most common type of equity release.

It’s similar to a standard mortgage in that a lender agrees to lend you a sum of money at an agreed rate of interest based on the value of your home.

You remain the owner of your home and if you can’t afford to make monthly repayments they can be added to the loan and repaid from the proceeds of your property sale.

You can choose to receive the finance as a lump sum in one go or arrange a drawdown facility, which is like an overdraft. You’ll only pay interest on the money withdrawn.

What are home reversions?

A home reversion plan involves selling part or all of your home to a plan provider in exchange for a tax-free cash lump sum or regular payments. You’ll be granted a lifetime lease of your property which allows you to remain living there, rent-free, for the rest of your life.

Like a lifetime mortgage, your plan ends when the last surviving homeowner dies or moves into long-term care – at which time your home is sold and the proceeds are split according to the proportions owned by you and the provider.

How does the equity release process work?

Taking out equity release is similar to taking out a standard mortgage, but with a few differences:

Step 1: Find an equity release adviser or a financial planner who is able to advise on equity release plans. You can use the Equity Release Council’s website to search for an expert who is a member of the council, which means they’ve agreed to follow its code of conduct.

Step 2: Your adviser will establish if equity release is the right option for you, compared to other ways of releasing cash from your home. After recommending the best plan and lender, your application is submitted.

Step 3: Your lender instructs a survey of your home to establish its value and whether the condition and type are suitable.

Step 4: Instruct a solicitor who is familiar with equity release transactions.

Step 5: You’ll receive a mortgage offer which is sent to your solicitor. The conveyancing process begins.

Step 6: Meet with the solicitor for independent advice.

Step 7: Agree a completion date and receive the funds.

Downsize or equity release: which is better?

The answer to whether downsizing or equity release is better will depend on what you’re trying to achieve and what’s important to you, explains David Forsdyke, head of later life finance at Knight Frank Finance.

“When considering which option is best, it’s really important to consider all the financial and non financial factors,” he said.

“To help you come to a decision, advisers will look at your financial position, what your income and expenditure looks like, what your wealth might be looking like for the future, the prospect of having to pay care costs and how you’ll fund that."

Advisers will also look at your budget plan to see if you can comfortably afford to live where you are. And they’ll probe you on how you feel about leaving your village and community and whether or not your current home will be manageable and safe to live in as you get older with the prospect of being less mobile.

What are the benefits of downsizing over doing equity release?

By downsizing, you’re not taking on a debt to release your equity which means the future value of your home isn’t being eroded by the interest your lender is charging.

Moving to a smaller property is also likely to have cheaper energy bills and council tax and will be cheaper to maintain. This can be important for retirees on a fixed income that isn’t keeping pace with price rises.

At the same time as releasing capital to support you in retirement or gift to family, you can choose a home that will better suit your needs as you get older such as a bungalow or a property that’s closer to local facilities or your family.

What are the benefits of equity release?

Using equity release means you can carry on living in your home while being able to spend the equity that’s built up over the years.

Andy Wilson, equity release specialist and owner of Andy Wilson Financial Services, said: “Homeowners shouldn’t underestimate how emotionally stressful moving can be later in life, particularly if they’re recently bereaved or the reason for moving is ill health.

“For many people it’s an emotional journey to have that wrench of leaving the home they’ve known for many years which in many cases is the family home. That’s what I put over to people, not to talk them out of it, to make sure they know what’s involved.”

As well as avoiding the upheaval of moving, here are some other benefits of taking out equity release:

• If you’re not able to make repayments, you don’t have to.
• You get to stay in a home you have strong ties to while enjoying the equity you’ve built up and you can ring fence some of your equity to pass on as an inheritance.
• You can liquidate some of your wealth to gift to members of the family without moving home. This can have inheritance tax advantages by raising a debt against your home which makes the property’s taxable value smaller while gifting money out of their estate.
• Fees are relatively low compared to the cost of moving house. It costs between £2,000 and £3,000 for an equity release loan compared to an average of £14,000 when stamp duty, estate agent fees and solicitor costs are factored in, according to moving experts Reallymoving.com.
• Borrowers can receive money gradually by taking out a drawdown lifetime mortgage. You can withdraw cash up to an agreed limit when you need it making the money easier to manage than receiving a lump sum from selling your home. And you can avoid exceeding the savings limit set by the government which affects your eligibility for some means-tested benefits.

What are the risks of equity release?

Before arranging your application, an equity release adviser must explain all the risks of equity release which are:

• The cost of borrowing will eat into the remaining equity in your home if you choose not to make any repayments.
• You will face hefty early repayment charges if you pay back the loan early. Some lenders will tie you into the plan for at least 15 years. Others tie you to the deal for life.
• If you need to move home in the future, although you can move your lifetime mortgage with you, known as porting, you may be restricted on the type of property you can buy. Depending on the value of the new property, you may have to repay some of the debt.
• Your means-tested benefits could be at risk if you take out a lump sum lifetime mortgage and the amount you’ve borrowed takes your savings beyond the limit allowed which can be between £6,000 and £16,000.

Note that interest can compound quickly. The amount you owe could come close to the value your home sells for, particularly if you have locked into a high fixed rate which will significantly erode the value of your estate. Most lenders now offer borrowers the option to repay some or all of their interest each month.