Downsizing cheaper than equity release

A new report has found moving to a smaller home is the cheapest way to release the money built up in your property.

Research from the Financial Services Consumer Panel shows downsizing is more cost effective than taking out an equity release product such as a lifetime mortgage or a home reversion scheme.

"Many people see their house as a potential source of income when they get older but equity release deals often don’t look like good value," said John Howard, chairman of the Financial Services Consumer Panel.

"At the same time the research seems to show that companies are not making excess profits from these products.

"However, taking out any equity release product is a complicated decision and we would advise consumers to take advice before signing up to any of them."

There are three main ways of releasing some of the money that has built up in your home.

The first is to simply move to a cheaper home, but this involves paying tax on the new home, estate agent fees, surveyors' fees, moving costs, and the soon to be introduced home information packs. And all of this comes on top of the stress and strain of moving house.

By contrast, home reversion schemes and lifetime mortgages let people stay in their home, and charge nothing until the person taking out the product dies or moves into permanent care.

Lifetime mortgages are simply a home loan with the interest payments deferred until the property is sold. They generally include a negative equity guarantee to ensure the interest payments and original loan amount will never be worth more than the value of the property.

Home reversion schemes are more straightforward. Homeowners simply sell a percentage of their home, and when they die or move into permanent care and their home is sold this percentage returns to the home reversion plan provider.

In light of this diversity, the consumer panel asked actuaries Watson Wyatt to look into which equity release product was the best value, and compare this with the cost of moving to a cheaper property.

Home reversion plans worked out to be twice as expensive as the next most expensive option, if the plan runs for just ten years, assuming house prices rise on average four per cent a year.

A 65-year-old would need to live for 30 years to get the same value from a home reversion plan as a lifetime mortgage.

When costs were compared on a house valued at £250,000, where the owner wants to release £50,000, trading down was the clear winner.

Watson Wyatt assumed the person releasing equity would live for 20 more years, house prices would rise by four per cent a year, and moving home would cost no more than £5,000.

Under these assumptions, lifetime mortgages cost the equivalent of 6.42 per cent interest on the £50,000 released, home reversion schemes effectively cost 9.05 per cent, and downsizing effectively costs 4.5 per cent.

If house prices rise faster than four per cent home reversion plans become more expensive and downsizing becomes cheaper.