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Equity release, downsizing and other options: what are the features and benefits?

Simon Stanney
Last updated 16th July 2024 by Scott Robertson
6 min read

When people retire, they tend to face a loss in income. Depending on their pensions, this can mean a drop in the standard of life they’re used to. As a result, people sometimes need to look for ways to support themselves financially in later years – such as equity release or downsizing.

There are several options available, and it’s important to consider the financial, practical and emotional implications. Here we briefly look at equity release and downsizing, plus some of the other ways you could access extra cash in your retirement:

Downsizing

This is when you sell your home to buy a cheaper property. It may be smaller or in a lower priced area. Once you’ve sold it and all costs have been paid, you keep the money left over.

Benefits

  • Can be straightforward – 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.
  • Spend the money as you wish – Once all the costs of moving are settled, you keep the money left over to help fund your lifestyle and needs.
  • Your new property will be 100% owned by you – When you're gone, it can be left to your loved ones as an inheritance.
  • A smaller or newer property could be more economical – Lower energy bills and maintenance costs mean you’ll probably pay less to run your home.
  • Future-proofing – Moving to a more practical property, like a bungalow or flat, could make sense to prepare for the future when you might be less mobile.
  • A fresh start – You may want to move to be nearer family. Or you might find it refreshing to start a new phase of life in a different area or in a different style of property.

Things to be aware of

  • Expensive moving costs – As well as the purchase price of your new home, you'll need to factor in estate agent fees, legal fees, removals and possibly stamp duty.
  • Home improvement costs – You may also have to spend money on improving your new home to make it how you would like it.
  • The emotional cost – 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. The hassle and stress of a move may also feel like too much of an ordeal.
  • Less support – Moving could be an opportunity to start afresh. But for some people it may mean leaving behind the support of family and friends currently on your doorstep. This can become even more important as you get older.

Equity release

Equity release is a financial arrangement that can give you a tax-free lump sum, or smaller instalments, while still living in the comfort of your home.

The equity release provider is repaid when your home is sold. This is normally when you (or your partner if they outlive you) die or move out permanently into long-term care.

Here are the benefits and risks of a popular type of equity release known as a lifetime mortgage:

Benefits

  • No need to move – Equity release allows you to stay in your home and access the equity in your property. This can be a great option if you don’t want to move house.
  • No monthly repayments – You can release some of the value tied up in your property without having to make monthly repayments.
  • The option to make repayments if you want to – Some plans allow you to pay off the interest regularly. This reduces the amount you owe over the lifetime of the loan.
  • Live comfortably – The cash you receive is tax free and you can spend the money however you like. (You just need to use the money you release to pay off any remaining mortgage.) You could take it as a one-off payment or in smaller instalments to help you live more comfortably.
  • Flexibility – Some lifetime mortgages offer flexible options to suit your circumstances, such as a drawdown facility. This lets you take the money out of your home when you need it, rather than a lump sum all in one go.
  • No negative equity – All equity release products that comply with Equity Release Council (ERC) standards have a ‘no negative equity guarantee’. This means you cannot leave your family with any equity release-related debt, as you will never need to pay back more than the value of your home. (However, a lifetime mortgage may result in limited or no property equity remaining. This will reduce your financial options in the future.)
  • You can still move house – Some plans give you the freedom to transfer your scheme to another property, as long as it meets the lender’s terms and conditions.

Risks and things to be aware of

  • Compound interest – With a lifetime mortgage, the debt is increased by compound interest, which is when interest is added to the loan as well as any interest that’s built up. This can mount up quickly. So the longer you have the loan, the more will need to be repaid when the property is finally sold.
  • Reduces inheritance – Equity release 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.
  • How much you can release – You can’t access 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.
  • House prices – With a home reversion plan, you sell all or some of your home to the plan provider at a discounted price. Neither you, nor your family, will benefit from any future rises in house prices on the portion you sold.
  • Costs – As with any financial product, there are costs involved in arranging an equity release plan. For example, 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.

Other options

There’s no one-size-fits-all when it comes to finances in later life. Here’s a quick look at other ways you may be able to access extra cash:

  • Home reversion – A type of equity release that allows you to sell all or part of your property in exchange for money.
  • Interest-only lifetime mortgage – A type of equity release where you pay off a certain amount of the interest in regular instalments. This helps reduce the amount of interest you pay overall, and retains more value for your estate.
  • Retirement interest-only mortgage (RIO) – A type of later-life mortgage that requires you to pay off monthly interest payments. RIO mortgages have no set date for you to pay them back by.
  • Savings or investments – You could put any savings or investments you have towards your retirement fund (for example, ISAs, stocks or shares).
  • Sell existing assets – You may have assets other than your home that could make you money – for example, property or a vehicle you no longer use.
  • Friends and family – While it may be a tricky conversation to start, it could be worth asking loved ones for financial support.
  • Pension pot lump sum – You may be able to take up to 25% of your pension as a tax-free lump sum, as long as the amount doesn’t exceed £268,275.

Read more about alternatives to equity release. Remember, it’s best to ask a qualified financial adviser to help you decide what’s the right option for you.

Always seek advice

Whether you choose to downsize, release equity or access cash another way, it's a big decision. It will need careful consideration and will likely have an impact on your family. So it’s important to include them in your plans too.

As with any major financial decision, before doing anything you must speak to a qualified specialist. They will take you through all the options available to you in detail.

If you’d like to find out more, we have a useful equity release guide explaining how it works and the different plans available.

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The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.