Thrifty Loans

For some, equity release might work better than downsizing to give them extra cash for their later years.

The managing director of home reversion specialist Home & Capital Advisers, Nigel Hare-Scott, says that downsizing may not be an attractive choice for some older people as it might mean moving away from family and friends, as well as giving up a much-loved home.

He said: “For most people, the thought of moving home (downsizing) at retirement in order to release money is not something they want to entertain, especially if they have lived in the property for many years. An alternative is the use of equity release as a way of boosting income in retirement, or to provide a cash lump sum to facilitate retirement aspirations like regular holidays, a new car and so on.”

He gives an example of a couple moving from a £350,000 home to one costing £200,000, hoping to net £150,000 in cash. However, the associated fees – valuation, estate agents, stamp duty, solicitors and moving costs – would eat away around £12,500 from the hoped-for profit, reducing it to £137,500.

As a comparison a 100% home reversion plan for someone aged 65 would release 43% of the property’s value, working out at £150,050, including a legal fee of £450. The older you are the better it gets. For example, someone aged 73 would get 53% of the value, netting £184,050.

Of course, the key difference between the two choices is that downsizing means retaining complete ownership of the property, which could then be passed on to surviving relatives.

There are two types of equity release: lifetime mortgages and home reversion. The first accounts for more than 90% of the market, but home reversion plans are now officially regulated and their popularity is expected to grow. In a home reversion, the owner of the home sells a share of the property for a lump sum. When the homeowner dies, the company then gets the agreed proportion of the sale proceeds. Thus, if a homeowner gives up 30% of the property value in return for a lump sum, the company will receive 30% of the value of the house on the death of the last partner.

In a lifetime mortgage equity release, homeowners take out a loan on their property, but the debt and interest is only repaid when they die or the property is sold. There is also an option to draw money when they need it.

Advisers recommend keeping family members informed before any decisions are made.

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