PF Financial

What's the difference between Downsizing and Equity Release?

After the challenging year that we have all had, a lot of people are looking for different ways to unlock more money to help fund their life. For those over the age of 55, one option is equity release, which enables you to unlock money that is tied up in your home. But is it better to go for this option or would downsizing make more sense? Read on to discover more about the difference between downsizing and equity release.

Understanding the difference between downsizing and equity release

There are pros and cons associated with both options. If you downsize, you have a debt-free way of getting the funds you need. However, you’re going to have to move out of your home, which could be something you don’t want to do. With an equity release mortgage, you get to stay in your home. You won’t have any extra monthly payments, but it does mean that what is left in your inheritance to your family is likely to reduce. 

Downsizing your property

When you downsize your property, you sell your current home and you purchase a cheaper property, which should, therefore, leave you with some extra cash. Of course, there are fees that are associated with selling your property and moving into a new one, so you will need to factor these in as well.

Equity release 

There are two options when it comes to equity release schemes: a home reversion plan or a lifetime mortgage. It is important to understand both so you can determine which one is going to be right for you.

With a home reversion plan, you agree to either sell all of your property or a percentage of it, and you will get a tax-free sum of money from the home reversion company in return. With this option, you are not charged any interest and you can continue to live in your home, rent-free, for the rest of your life or until you move into care on a full-time basis.

If you decide to opt for a lifetime mortgage, this is a loan that will be secured against your home. With this, interest is accrued, yet this will be paid off when you move into permanent care or when you pass away, meaning no monthly payments. When this happens, your executor will have 12 months to sell the property at a reasonable market price. 

Hopefully, you now have a better understanding of the differences between downsizing and equity release schemes. There is no right or wrong answer; it is all about figuring out what is going to be right for your situation. The best thing to do is to use an equity release calculator so you can figure out if this makes sense for you from a financial point-of-view.