After the challenging past few years we have all experienced, many people are looking for different ways to unlock money to help fund their lifestyle. For those aged 55 and over, one option is equity release, which enables you to unlock money tied up in your home.

But is this the better option, or would downsizing make more sense? Read on to discover the difference between downsizing and equity release.

Downsizing vs equity release: understanding the difference

There are advantages and disadvantages associated with both options.

If you downsize, you have a debt-free way of accessing the funds you need. However, you will have to move out of your home, which may not be something you want to do.

With an equity release mortgage, you can remain in your home and there are usually no required monthly repayments. However, the amount of inheritance you leave to your family is likely to be reduced.

Downsizing your property

When you downsize, you sell your current home and purchase a less expensive property, leaving you with the remaining funds.

Of course, there are costs associated with selling your property and moving into a new one, so these should be factored into your decision.

Equity release

There are two types of equity release scheme: a Home Reversion Plan and a Lifetime Mortgage. It is important to understand how each works so you can decide which, if either, is right for you.

With a Home Reversion Plan, you sell either all or part of your property in exchange for a tax-free lump sum. In return, you can continue living in your home rent-free for the rest of your life, or until you move into permanent care.

With a Lifetime Mortgage, you take out a loan secured against your home. Interest accrues on the loan, which is typically repaid when you move into permanent care or pass away, meaning monthly repayments are not usually required.

When the loan is repaid following your death, your executor will generally have up to 12 months to sell the property at a reasonable market price.

Hopefully, you now have a better understanding of the differences between downsizing and equity release. There is no right or wrong answer; it is about deciding which option is most suitable for your circumstances.

A useful starting point is to use an Equity Release Calculator to help determine whether equity release makes financial sense for you.