As the cost of retirement increases, you may be considering releasing wealth from your property to support your lifestyle.
Your home can be one of your largest assets, but turning property wealth into sustainable retirement income requires careful planning.
Different approaches suit different circumstances, and all of the most common options have their advantages and downsides.
Discover some of the ways you can release income from your property, and the pros and cons of each.
1. Downsizing to a smaller property
Selling your current property and moving to a smaller, cheaper home is one of the most common ways to release equity.
There are several benefits to downsizing in this way, including:
- Freeing up a lump sum to supplement your income or for other purposes
- Potentially reducing your ongoing maintenance costs
- Lowering your monthly utility costs.
Furthermore, moving to a smaller property can be a big step towards a simpler retirement, both in terms of where you want to live and the type of life you want to lead once you stop working.
However, downsizing has some disadvantages that you need to take into account.
For one thing, smaller homes can still be expensive due to high demand. You may have the idea of selling up and moving to a small cottage near the sea, but others may have had the same idea, driving up prices.
Also, bear in mind that the costs of moving, such as Stamp Duty, actual moving costs, and estate agent fees, can take a big chunk out of your profit.
There are also non-financial challenges to living in a smaller space. As well as the emotional wrench of leaving a property you may have lived in for decades, you will also have to adapt to less living space than you have grown used to, which could necessitate unwelcome lifestyle adjustments.
2. Releasing equity from your current property
This well-known option, commonly referred to as “equity release”, lets you access money tied up in your property without moving.
This can be taken as a lump sum, regular income, or a highly flexible “drawdown” facility, allowing you to take sums as and when you need them.
One big advantage of equity release is that there are no monthly repayments. The debt is rolled up, and the outstanding sum is repaid when the property is eventually sold after your death.
It also means you can stay in the same home you have grown used to and continue to enjoy the growth in value.
Perhaps the biggest downside to this type of arrangement is that interest on the amount you have borrowed compounds over time, so the final debt can be substantial compared to the amount you released.
This sum will need to be repaid by your beneficiaries and is likely to mean they will have to sell the property. As the majority of the proceeds will go towards repaying the debt, the size of your estate could be greatly reduced, meaning you have less to leave to your loved ones.
It can also cause complications if you eventually decide you do want to move, as the outstanding sum will need to be repaid at that time.
Additionally, the extra wealth you receive from equity release can affect your eligibility for certain means-tested benefits.
3. Using a retirement interest-only mortgage
This option is similar to equity release, but rather than letting the interest roll up, you repay it monthly, just leaving the capital sum you borrow to be repaid from the value of the property when you pass on.
An interest-only mortgage of this kind could work for you if you can evidence a reliable retirement income to cover the monthly interest payments.
It means that you will still enjoy the appreciation in the value of your property and the certainty of the amount to be repaid.
However, as with equity release, there is still the issue of the loan having to be repaid at some stage, either when you move or when your beneficiaries inherit the property.
Additionally, because the loan is secured against your home, failing to keep up with monthly interest payments can result in your home being repossessed.
4. Selling your property and renting
The fourth option for releasing wealth from your property is to sell it and then rent rather than buy.
Clearly, this will release a substantial capital sum, with none of the purchase costs associated with the downsizing option you have read about.
Renting also offers the added benefit of no longer having property maintenance responsibilities.
There are some drawbacks to this option, however.
- Rental costs mean that at some stage, you may use up all your capital sum
- You will not enjoy any future growth in property value
- Rent increases could mean your living costs rise considerably over time
- You may get used to living somewhere and see it as a long-term option, only to find that the landlord wants to sell.
Selling and renting also gives you the flexibility to move from one place to another at relatively short notice, which means that it could be an ideal option if you want to live abroad for a time or try living in different parts of the UK.
The importance of financial planning
All four of the options you have read about have their benefits but also their downsides.
While your property is clearly a valuable asset, ideally, you should not have to draw on its value to provide a comfortable retirement, as doing so can easily upset your long-term financial plans.
Instead, careful planning could allow you to fund your retirement without using property wealth.
This will then leave releasing wealth from your property as a fallback position in the event of unforeseen circumstances that blow your plans off course.
Get in touch
If you have any questions about your own financial planning arrangements, please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
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.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.