Is equity release the new downsizing?
The longer your retirement lasts, the more money you will need to fund it. That’s just basic common sense, but it raises the obvious question of how to find that money. For some people a pension on its own may be sufficient to maintain their current standard of living, but others may be faced with a choice of making a lifestyle change (such as downsizing) or tapping into other sources of funds such as the equity in their home (equity release).
While everyone needs to make their own decision based on their own circumstances and preferably with professional guidance, there are some standard points most, if not all, people should consider.
If you want to downsize for lifestyle reasons then you may want to consider trying it out for a while before making any final decisions about what to do with your current home. For example, the idea of meandering round the UK's canals on a live-aboard narrowboat may sound very appealing in theory but you might want to wait until you've done it over the colder months before deciding whether or not you really want to do it permanently, or at least for the foreseeable future.
If you are thinking about downsizing for financial reasons, then you should do your sums very carefully. Remember to account for all the costs of making the move, from selling your current home to organising the physical move into your new one. Also remember that if you buy a new home before you sell your old one, you will need to pay the second-home surcharge and then recoup it.
You should also think about the "intangible" aspects of your move. Be aware that these could have a knock-on impact on your finances. For example, if you move away from your family and friends, then you may need to think about the cost of keeping in touch with them.
The issues surrounding equity release are arguably a classic example of "the same but different". Equity release allows you to stay in your current home until you die (or move into permanent care) but this, of course, raises the question of what will happen if you later decide that you want (or need) to move.
With this in mind, it can be helpful to take a good, hard look at your current home (and your local area in general) and decide how suitable they are for someone in the latter stages of the ageing process. If they are not currently suitable, can they be made suitable and if so how much would it cost to do so and would this cost be financially viable for you?
In short, before you take any final decision on whether or not you really want to stay in your current home over the long term, it's probably a good idea to see if you actually can.
Assuming the answer is yes, then you will need to think seriously about whether or not you are sure that you want to make that commitment. If you're not, then you may still be able to make use of equity release, but you would need to look for a provider which could offer you the necessary flexibility.
You would also need to think particularly carefully about how equity release could impact your finances over the course of the future. For example, if you took out equity release on your current home and then wanted or needed to move, then you would potentially need to pay off the equity release plan, buy a new home with the second-home Stamp Duty surcharge, cover your moving costs and the costs of selling your current home and then recoup the Stamp Duty surcharge.
Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.