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HomePropertyMortgagesEquity Release vs Downsizing: What Are the Pros and Cons of Each?

Equity Release vs Downsizing: What Are the Pros and Cons of Each?

For older homeowners, it can be both exciting and frustrating to realize just how much your property has increased in value over the years, and the extent to which your cash is tangled up in bricks and mortar.

This is where the decision to either sell up and downsize, or use an equity release loan package comes into play. There are positive and negative aspects to each option, so let’s weigh them up to help you decide which is right for you.

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Photo by Thirdman from Pexels

The basics of equity release

Simply put, you can unlock cash with equity release by getting a loan based both on the value of your home and your age.

This loan is not like a standard mortgage, because there are no monthly repayments to make. Instead, the lender will recoup the amount you borrow, plus interest, only once your home is sold after you die or are moved into a residential care facility.

An introduction to downsizing

As the name suggests, when you downsize, you sell your family home and move to a different property, with the expectation of freeing up some cash in the process.

Most people who downsize do so after their children have grown up and moved out. This means moving to a home that is physically smaller than their current property, as they no longer have need of all the rooms.

The benefits & caveats of equity release

Equity release is appealing because it means you get to stay put in your current pad, and you can still access tens or even hundreds of thousands of dollars in a lump sum to be used as you see fit.

You could fund your retired lifestyle without having to count every penny, or you could give the cash as a gift to a family member who is hoping to buy their own home. There’s no tax to pay, and no monthly repayments, as mentioned.

The downside is that interest will accumulate and when repayment finally does occur, it will diminish the size of the estate that you can pass down as an inheritance.

The perks & pitfalls of downsizing

The main reason to choose downsizing over equity release is if you are worried about how much the interest will eat into what you can leave to the next generation after you are gone.

The other advantage is that you won’t have to worry about maintaining a larger property as you get older and are less physically capable of things like cleaning.

Obviously you may be put off the prospect of downsizing if you are emotionally attached to your current house, or if you still need all of the space you have now for hosting kids and grandkids, amongst other things.

Another complication that comes with downsizing is that you will have to put yourself through the stressful process of searching for, buying and moving to a new property, as well as selling your old house. This is one of the most anxiety-inducing things anyone can do, and might really sour the experience if you are on the fence.

Final thoughts

Your own circumstances and preferences will impact whether or not downsizing is right for you, or if equity release is the better route to take.

The last thing to think about is that downsizing does not have specific eligibility requirements, such as a minimum age, while equity release does involve customers meeting the specifications laid out by lenders.

If in doubt, always speak with a qualified finance professional to get situation-specific guidance that will help you live a fulfilled, financially secure life after retirement.

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