Downsizing and other equity release alternatives
Have the kids left home and the old place suddenly feels too big? Or perhaps you need to release some cash from your property? Whatever your reason, downsizing can be a simple way to fund your retirement.
Equity release schemes like lifetime mortgages and home reversion plans usually grab the headlines because they’re a way to raise cash from your property without moving home.
Downsizing for retirement sometimes gets ignored as an option. Of course, selling up and leaving the family home can be an emotional decision, but it’s a simple way to move into a smaller home that’s easy to maintain – with funds to spare.
Could downsizing for retirement be right for me?
Downsizing could be a great option for you if you can say ‘yes’ to one or all of the following:
- You need to raise money to pay for long-term care costs but aren’t ready to move into a care home
- Your pension pot isn’t big enough to live on
- Living in a smaller, cheaper, more manageable home would make life a lot easier
- You’d like to gift money to your family
- You’re ready for your next big adventure!
- Leaving your property to your family isn’t a key consideration
- You need to pay off debts.
Is there a downside to downsizing my home?
Moving out of a much-loved family home is almost always an emotional decision. All those memories. Not forgetting all that furniture!
Smaller houses and retirement homes are in demand, so you may have to move out of the area and could lose touch with family and friends. Not to mention the fact that you probably always planned to leave your home to your family.
What are the costs of downsizing?
Selling and buying properties inevitably means incurring costs, some of which you may not have considered:
- Solicitor fees
- Surveyor fees
- Estate agent fees
- Removal fees
- Stamp duty (depending upon the value of the home you buy).
We could see a potential drop in house prices after the current COVID-19 pandemic, so it might be wise to see how the housing market responds.
What are the alternatives to downsizing?
Of course, there are other alternatives to downsizing, particularly if you really don’t want to move house or have income or assets besides your property. Each of these has different pros and cons.
Equity release schemes like lifetime mortgages and home reversion plans are the other main ways to release cash that’s tied up in the value of your property. The difference between these and downsizing is that you can stay in your current home.
This is the most popular form of home equity release scheme. With this option you take out a fixed interest rate loan that’s secured against your property. In return you receive either a tax-free cash lump sum or monthly payments.
Unlike a standard mortgage, there are no monthly payments to make. Instead, the outstanding interest is compounded (added to the debt), and the whole debt is repaid when you pass on or sell your house and move into a care home.
The downside of the compound interest element is that your debt rapidly increases year-on-year and can erode the value of your home. Consequently, many providers offer a ‘no negative equity guarantee’ ensuring that your debt will never be more than the value of your home when it is sold.
With a home reversion plan you sell your home to a provider for less than the market value, in return, you have the right to live in the property rent free and receive a lifetime income.
These plans are less popular than lifetime mortgages because you will only get between 30% and 60% of the value of your home and you can’t sell your home until you pass on or move into care.
Remortgaging your existing home with a larger loan is a popular way to get access to funds. However, you’ll need to be eligible for standard mortgage products to access this option. Historically, this has been more difficult in later life, but now many providers are making mortgages designed for older borrowers, with upper age limits well beyond the standard state pension age.
Refinancing an investment property
If you have another property, perhaps a buy-to-let investment or a property you’ve inherited, as part of your portfolio you have a range of options to raise funds. In this case, your options could be:
- Selling your investment property
- Renting a property out and using the rental income
- Taking out a second mortgage (a secured loan) on an investment property you own
- Refinancing your investment property on an interest-only basis.
Secured loans (second charge mortgage)
Secured loans (also known as ‘second charge mortgages’ or ‘second charges’) are another option for raising large sums by borrowing against your home (or an investment property), rather than releasing equity from it.
Lenders will usually offer quite favourable interest rates on these products because you’re effectively offering your home as collateral.
Unsecured loans/personal loans
If you’re only looking to raise a small amount rather than a large sum, and are able to pay it back in the next few years, then a personal loan may be the best solution. Interest rates in 2020 are currently very low and there are some good deals around if your credit rating is good.
If you haven’t paid off your mortgage by the time you retire, your lender may agree to extend the term of your home loan for another five or ten years. This would mean your monthly mortgage payments would decrease. Some lenders may have an upper age restriction of 65, but others are more flexible, in some cases increasing age limits to 80, 85 and even as far as age 95!
Retirement interest-only mortgages (RIO)
With a retirement interest-only mortgage you pay only the interest on the loan until you pass on and your house is sold, or you move into care. With this kind of mortgage you can usually remortgage with your existing deal, either to release some of the equity in your home or help with the cost of your existing debt.
There is no upper age limit for applicants, and you only need to demonstrate that you can afford to pay the interest, which makes this option more achievable for those on a more limited pension income.
If you only need to raise a smaller sum, an option to consider could be taking out a credit card with a low interest rate. Some providers offer 0% interest on their credit cards for up to 24-36 months which could in theory save you money. As ever, make sure you are aware of all the terms and conditions if you decide this route is right for you.
Some other alternatives available
How about renting out a spare bedroom or even your driveway? Under the government’s Rent a Room scheme, you can earn up to £7,500 a year tax free.
You will need to seek permission from your mortgage lender and your insurer before you do this or you will risk being in breach of your mortgage contract and any insurance claim may be invalid if any damage happens as a result of the rental. You may find that your insurance premium rises.
If you live near a railway station, airport, entertainment or sports venue your driveway or garage may be in demand. There are websites which will handle all the bookings, hassle and payment for you. You should seek the approval of your insurance company before you do this.
Money can be tight on a state pension so it’s well worth contacting your local authority to check if you are entitled to any grants or loans. The rules about how these schemes work vary, and the conditions you must meet in order to qualify can be different. However, most are designed to help if you’re on a low income.
Grants are often available to help with the cost of adapting, improving or buying a new home. Disabled facilities grants are also available, specifically for work that’s essential to help you live an independent life. If you have taken out a loan to make home improvements, you may be entitled to a Support for Mortgage Interest loan (SMI).
When your retirement income is limited, it’s always a good idea to constantly review your finances to find any areas where additional savings can be made. Free financial advice is also available from a variety of places like Citizens Advice to help you check if you are claiming the benefits you might be entitled to.
If you have savings, investments or any other assets that could be drawn upon, this could be another way to give yourself a cash boost. For most people this is a quick, low-cost option, which doesn’t require significant time to arrange. However, make sure you won’t incur any charges or penalties for withdrawing from any medium or long-term investments. In some cases, you could risk getting back less than you invested.
Have you checked whether you have any deferred pension arrangements? Under pension freedom rules, you can now access your pension fund from age 55. This could help solve an immediate need for funds. However, it’s a good idea to take independent financial advice before you make withdrawals from your private pension.
Could you continue or return to paid work to top up your income? Part-time jobs can be fun, and will bring benefits like learning new skills, the opportunity to use your experience in a new role as well as meeting new people and improving your quality of life.
Accepting short-term financial help from family relatives might save the overall cost of going ahead with more expensive alternatives. If you plan to leave your assets to your family, any costs related to maintaining them will reduce the overall value of what you leave. So it may well be in their long-term interests to help you out in the short term..
The importance of getting independent advice
With all of the above options there are many things to consider. Retirement planning can be complex and confusing, particularly if finances aren’t your strong point, so it’s wise to take independent financial advice before committing yourself and your future to something you are unsure of.
Now you’ve explored using your home to fund your retirement, why not find out more about the different ways to use your pension pot when you retire?
The information on this page was sourced between June - October 2020. Information on this site does not constitute any form of advice, representation, or arrangement by us and you take full responsibility for making (or refraining from making) any specific investment or other decisions. You should take independent financial advice from an adviser who is registered by the Financial Conduct Authority.
[i] Source: Mortgage Finance Gazette, Feb 2020