The effect of equity release on future downsizing

Will equity release prevent me from downsizing in the future?

Written in line with our editorial policy.

Some homeowners worry that if they arrange an equity release plan, they’ll be tied into staying in their current home for the rest of their lives. The truth is that many plans today come with a “right to move” guarantee.

To help you understand the effect of equity release on future downsizing and which lenders guarantee your right to move home in the future, we’ll be discussing the following in today’s article:

• What does equity release involve?
• Can I downsize after equity release?
• What happens to my equity release plan when I downsize?
• Effects of downsizing to a lower value property with equity release
• Effects of moving to a more expensive property with equity release
• Repaying equity release early when you move or downsize
• Find out more about equity release

What does equity release involve?

Homeowners aged 55 and over have a range of lending options should you need to borrow some money. One of these is equity release, which allows you to unlock a tax-free cash lump sum from the value of your home. 

The money can be spent however you want after any outstanding mortgage has been paid off. There are typically no monthly repayments to make as the interest rolls up each month and adds to the overall loan. Instead, when you pass away or move into long-term care, your home is sold to repay your loan plus interest.

If you want to make payments towards your plan, you can make interest payments with an interest-only plan, or make penalty-free payments on the loan, up to a certain amount each year.

To find out how much you could borrow, check here or talk to one of our friendly consultants by calling 0808 178 3055 or request a call back.

Can I downsize after equity release?

Yes, if you have an equity release plan it is still possible to move house to downsize in the future should you wish to.

If you think you may want to one day move or downsize with equity release, make sure you select a lender that the Equity Release Council (ERC) approves. You can view the list of providers on their panel here.

All lenders who are members of the ERC must allow customers to move to a ‘suitable alternative property’ and take their equity release plan with them without incurring early repayment charges. Your new home must meet your lender’s criteria, so it is important you check with your lender before committing to a property.

The good news is that at Equity Release Wise, our selected advisers will only compare and recommend plans from providers who are members of the ERC.

What happens to my equity release plan when I downsize?

When you downsize with equity release then your plan will typically ‘port’ over to your new home. This means that the original terms and interest rate on your plan will remain the same. 

Alternatively, you may decide to repay your loan when you downsize your home. You can read more about this further below.

Effects of downsizing to a lower value property with equity release

If you want to move to a lower value property than your current home, you may have to pay back some of your equity release money from the sale proceeds. This is because the amount of money you can borrow is based on your home’s value.

It means if you were to move to a property worth half your current home’s value, your equity release provider may require you to repay half of what you owe once the sale completes.

Do bear in mind that you may incur some fees when downsizing with equity release. For instance, there may be a valuation fee and you may have to cover the lender’s legal costs to transfer the charge. 

Furthermore, if your provider is not a member of the Equity Release Council or your new home does not meet your lender’s criteria, you may incur early repayment charges.

Effects of moving to a more expensive property with equity release

Of course, downsizing your home doesn’t necessarily mean buying a cheaper property. The reality is that many over-55s bungalows and retirement properties can be quite expensive due to their high demand. 

Whilst you might incur some fees by porting your equity release plan, if your new home is of a higher value, you may be able to unlock more money from it. If you have a cash shortfall then this could provide the extra funds needed to complete the purchase. 

Do remember of course that unlocking more cash from your property will further reduce the value of your estate and the amount of inheritance you leave.

Repaying equity release early when you move or downsize

If you downsize and either choose not to or cannot take your equity release plan with you, then you will need to repay your loan early. 

You should be aware that you may incur an early repayment charge for paying back your plan before you pass away or move into long-term care.

However, there are some circumstances when you may not have to pay any early repayment charges for paying off your plan early when you downsize. These include:

• You repay your plan after the fixed early repayment charge term has ended.
• Your lender offers a ‘significant life event exemption’, also known as ‘compassionate early repayment charges’. This allows you to repay your loan without penalty within three years of your partner passing away or moving into long-term care.
• You have downsizing protection. This gives you the freedom to downsize your home and repay your loan in full without incurring any penalties, once you have had your plan for a minimum of five years.

You can read more about paying off your equity release plan early here.

Find out more about equity release

Choosing the right plan and provider can make a huge difference to your future options when it comes to downsizing with equity release. With some lenders offering greater flexibility and features including downsizing protection, it’s essential you seek proper advice before making a decision.

Our selected advisers will take the time to understand your current and future needs before searching for the best option for you. They will also ensure you fully understand the effect of equity release on future downsizing and can answer any questions you have. 

Call our friendly team today on 0808 178 3055 or request a call back at a time that suits you.