If you’re fast approaching or already at retirement, it’s sensible to start thinking about how you’re going to support yourself in this new stage of your life.
Whether you’ve built up a healthy pension pot over your lifetime or you intend to liquidate your investments, you’ll likely see your income drop when you finish work as you start using those life savings to live.
You may also be starting to think about how you might pay for later-life care, especially with the government’s recent announcements to changes in how you have to pay for social care.
With all these considerations, one place you may not yet have thought about for retirement income is your home. If you own your home, that means you may have many thousands of pounds tied up in bricks and mortar.
As a result, you may want to consider downsizing or maybe even an equity release product to make use of all that value.
Of course, one or both of these strategies may not fit into your plans, depending on your financial goals.
So, read on to find out everything you need to know about downsizing and equity release, and whether they could be useful strategies for you.
Downsizing to a smaller home
Downsizing simply means buying a home that’s smaller than the one you currently own, with the goal being to buy a home that’s cheaper than where you live now.
Pros of downsizing
Get yourself a lump sum
Downsizing can provide you with a lump sum of cash as smaller homes tend to be cheaper than larger ones.
You may also find some extra money in selling excess items that you no longer need and won’t have space for in a smaller home.
Retire somewhere you always wanted to live
Downsizing may allow you to purchase a smaller home in an area where you’d have liked to live before but couldn’t afford the size of home you wanted for your family.
Fewer costs and less upkeep
Moving to a smaller home can also be a practical consideration.
For one thing, having less space means there’s less to look after. If you live in the home where you raised your children, or even a home that you bought more than 10 years ago, it may now be bigger than you need to live your life.
This should be a consideration as you get older, when simple tasks like cleaning become more difficult as you lose mobility.
Smaller homes are also cheaper to heat, meaning you can make savings on your utilities.
Cons of downsizing
Financial costs of moving
Firstly, there are many costs to moving home. From estate agent fees to Stamp Duty, the costs of moving home can quickly rack up into thousands of pounds.
While you may make money on the sale of a larger home, you need to make sure that the move is still cost-efficient when the total costs of moving are factored in.
Emotional costs of moving
As well as a financial cost, there can be an emotional cost to leaving your home.
For example, you may live in the same house as you did when you first got married, or where you raised your children. As a result, leaving may be emotionally challenging.
It’s both a blessing and a curse to have less space in your home. While there may be less upkeep, and it may encourage you to get rid of things you no longer need, you need to be mindful of the fact that having less space may require you to adapt more than you think.
For example, you may move from a detached home to a semi-detached one. This may sound harmless, but sharing a wall with neighbours can be noisy, especially compared to what you’re used to.
Keep practical considerations like this in mind, too.
Using equity release
Aside from downsizing, you could consider using an equity release product.
Equity release means taking out new borrowing on your home to access the money tied up in it.
There are two main types of equity release product: lifetime mortgage, or home reversion.
Lifetime mortgages allow you to borrow a lump sum, which is repaid when your home is sold either when you move into care or on your death. Typically, you can borrow somewhere between 18% and 50% of your property’s value.
This mortgage accrues interest like any other. Most lifetime mortgages have a “no-negative-equity-guarantee”, meaning the total you owe back at the end will not exceed the total value of your home.
Home reversion means selling part or all your home but retaining a legal right to continue living there. This provides you with a lump sum to spend, while also allowing you to remain in your home.
Bear in mind that you likely won’t receive market value if you choose home reversion.
Pros of equity release
Access the value in your home
Equity release directly allows you to access money tied up in your home. This can be especially useful if your home has risen in value since you bought it, or if you have few other assets available for living on in retirement.
You don’t have to make any repayments until you die or go into care
While you can pay off interest throughout your lifetime with an “interest paying mortgage”, you can also leave the interest to grow on an “interest roll-up mortgage”.
This reduces your outgoings in retirement, leaving you to simply use your lump sum as you wish.
Reduce the value of your estate
The value in your home above a threshold called the “residence nil-rate band” (RNRB) will count towards your estate. As of October 2021, the RNRB is £175,000.
Meanwhile, using equity release would reduce the value of your home included in your estate, potentially mitigating part of an Inheritance Tax bill.
This could allow you to spend the value tied up in your home in retirement, rather than it going to the government.
Money could be used to pay for care
You may be able to use the money you receive to pay for the costs of care in later life.
Interest could rack up, reducing your family’s inheritance
While it’s obviously useful to you to not have to make payments during your lifetime, the impacts of compound interest could mean your family owe as much as the whole of the property value.
This could reduce the amount they receive in inheritance.
Money you release may impact your means testing
Having a lump sum from an equity release product may push up your total value of “capital assets”. This may impact your means-tested benefits in later life and may mean you have to pay more towards the cost of your care if you ever need it.
Want to find out more?
If you’d like help working out whether your home could be part of your retirement plan, please get in touch with us at Cordiner Wealth.
We can provide personalised financial advice that takes your circumstances and goals into account and tell you whether downsizing or equity release are the right choice for you.
Email firstname.lastname@example.org or call 0113 262 1242 to speak to us.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.