Reader's Question on Downsizing and Equity Release

We have lived in our very large house in a very small village for nearly 25 years, where we have built a life and are very happy. The house now has a very high value in financial terms.

However, we are now looking at the prospect of having to make a downsize move, mostly because of the financial implications of owning a house of this size, such as higher heating bills, council tax, insurance and other essential expenditure.

We have looked into the area of equity release schemes but have constantly been told that it is more cost effective to downsize to a smaller property. However, even if we did downsize to such a property, it would still be of a high value in this area.

Additionally, it would be very expensive to make this move, considering the potential costs involved in moving home. We have calculated that it will cost us close to £100,000 to move, taking into account estate agent fees, legal fees, stamp duty and various moving costs. This £100,000 is immediately wasted and, on a personal note, we would have to start a new life in our retirement.

These factors therefore bring us back to equity release. We would require an additional income of up to £20,000 per annum for possibly a ten-year period before we need to move. If the calculation was for a property valued at £1.5 million, we would only need an increase in the property value of around two per cent a year to cover the withdrawal of £20,000 for income and the interest payments. Would this be the preferable solution in investment terms for our situation, rather than taking the money out of the property by downsizing, especially in view of the current outlook for house prices, and then investing the funds elsewhere and paying more tax on the funds we have released?

G Boot, Kent


Philip Spiers says:
Considering the alternatives to equity release should be a fundamental part of any customer’s assessment process.

Downsizing, using existing savings, assistance from family and friends, or access to additional state benefits could reduce or eliminate the need to release money from your property.

You  have rightfully considered downsizing, but are uncomfortable with the financial and emotional costs involved. This is where equity release could prove to be the most logical solution. Equity release simply allows you to borrow money against the value of your home now, with the debt being repaid from the sale proceeds at a later date.

So an equity release provider, for example, could advance an initial £20,000 lump sum, while also making available a further borrowing facility of £133,000. Should you then wish to withdraw £20,000 per year as expected, the total liability by the end of year ten would be £290,652.

Had you borrowed the same £200,000 as a single lump sum in year one, the total debt outstanding would have been £382,435. Therefore, simply by borrowing the money only as required you would be able to reduce the cost of the borrowing by £91,783. However, before proceeding, you should seek specialist independent equity release advice to ensure that the most appropriate plan is chosen.