When it comes to later in life, your home is likely to be one of your biggest assets. So, what do you do when your children have flown the nest, and much of your wealth is tied up in bricks and mortar?
Typically, if you want to access the value in your home, you’ll have two choices:
- Sell the property and buy a cheaper home. You’ll then pocket the cash generated from the sale
- Remain in your home and access the value through borrowing.
With equity release schemes becoming more and more popular, you have never had as much choice. However, the pros and cons of selling up or staying put are often more than simply financial, so read on to find out which approach might be more appropriate for you.
Downsizing can free up cash – but could be trickier than you think
Selling your family home and moving into a smaller property – or one better suited for local amenities – is one way of freeing up some of the cash tied up in your home.
According to Land Registry figures, the average price of a detached house in the UK was £457,552 in July, while a typical flat or maisonette was priced at £234,000. The average semi-detached house cost £283,077.
So, selling your family home and moving into a flat or smaller property looks like an easy decision, freeing up a significant sum that you can use to supplement your retirement income.
However, downsizing involves you being able to find the right property to move into.
For example, you may decide that you’d prefer a bungalow. Even though this may be much smaller than your family home, the Times reports that, across the country, bungalows were an average of just 9% cheaper than average family homes.
By the time you have factored in Stamp Duty and the cost of moving – which the Times reports is £9,640 – you might not free up any cash by downsizing to a bungalow.
Indeed, in some areas, moving to a bungalow is likely to cost you more than staying put. Figures from estate agent Hamptons, reveal that, in Norwich, the average bungalow costs 29% more than the average three or four-bedroom family home.
In South Tyneside, Thurrock in Essex, Copeland in Cumbria and Walsall in the Midlands a bungalow costs at least 20% more.
Moving from the countryside to be closer to urban amenities may also be more expensive – and that is if you can find a suitable property.
If you’re older, for example, you may need an accessible entrance, walk-in shower or a stairlift and these can be hard to find. You may also need a bigger home than you think – for example, if you want space for family and friends to visit.
Of course, if you can find the right property for the right price, there can be benefits to downsizing.
Firstly, there is the cash you can free up from the sale. Moving to a cheaper home can release equity that you can use for your other lifestyle needs.
In addition, a smaller home may help you to reduce other costs, such as your Council Tax or energy bills. It may also require less costly maintenance than an older family home.
Equity release can enable you to stay in your home
If you love where you live, or you want to remain in your family home, then you’ll need an alternative to downsizing if you want to release the equity tied up in your property.
The most obvious alternative to selling up and downsizing is equity release.
If you’re over 55, equity release enables you to withdraw tax-free cash from the value of your home. You can take the money as a single large lump sum or as a series of smaller payments, and use it in a wide range of practical ways, including:
- Helping a child or grandchild onto the property ladder
- Home improvements
- Big one-off purchases such as a holiday or new car
- To pay off debt
- Reducing a potential Inheritance Tax bill
- Maintaining your chosen living standard in retirement.
Under equity release, the loan is only repaid when you die, sell the house or move into care. Most plans are set up so that you never owe more than the total value of your property, even if its price falls.
Under a lifetime mortgage, you can pay the interest on your loan monthly. However, you don’t have to, and can instead add it to the debt to be repaid when you die or sell your house. This is called “rolling up” interest.
The key advantage of equity release is that you can remain in your home. If you are happy where you are and you don’t want to move, equity release means you can stay put and access some of the equity tied up in your property.
You can use the money for any purpose you like. So, for example, if you wanted to help your children or grandchildren onto the property ladder by gifting some money now, equity release could enable this.
What you do need to remember is that the interest that accrues will build up quickly, and will eat into the value of any legacy you want to leave to your family later on.
For example, the Times reports that if you pay an average interest rate of 7.54%, your debt will double every nine and a half years. This could mean that your beneficiaries don’t inherit anywhere near the amount they expected, once any loan on your home has been repaid.
We’ll help you find the right option for you
Ultimately, your decision will be influenced by your lifestyle requirements, whether you want to stay in your current home, and what you need the money for.
If you like where you live and you want to keep your family home, you may prefer equity release. Alternatively, if you want to remain debt-free, benefit from a smaller or more appropriate home, or you seek to pass on wealth in the form of a living inheritance, downsizing may be the answer.
As equity release and later-life lending experts we can help you find the right option for you. To find out how we can assist, please email [email protected] or call us on +44 (0) 20 3411 0079.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
