Downsizing, equity release and reverse mortgages: the real costs of turning your home into money

For a lot of people over 50, the house is the plan: worth more than every pension put together, mortgage nearly gone, and “releasing” some of that value a comforting idea. The trouble is that all three ways of doing it cost more, and change more, than the first conversation suggests.

This is general information, not financial advice. Equity release and reverse mortgages have legal consequences for your home, so a regulated adviser or approved counsellor should look at your own situation before you sign anything.

Option one: sell and move somewhere cheaper

Downsizing is the simplest option and the easiest to under-cost: the money you free up is the price difference minus everything the move eats. MoneyHelper’s UK list gives the scale. Estate agents typically charge “between 1% to 3% of the final sale price plus 20% VAT”. Solicitors average around £2,000 including VAT, local searches £250 to £300, a survey £400 to £1,500, removals £400 to over £1,000. Its summary: “you could potentially spend over £5,000 on fees” before the deposit and taxes, “or double that amount when both buying and selling simultaneously”.

Then tax on the purchase. In England and Northern Ireland, Stamp Duty Land Tax on a main home is charged in slices: nothing up to £125,000, 2% to £250,000, 5% to £925,000, 10% to £1.5 million and 12% above. Scotland and Wales have their own systems; in the US, closing costs play the same role.

Beyond the numbers: will the new place suit you at 80 as well as 65, for stairs, buses, a GP (family doctor) and the people you rely on? Will you be leaving neighbours, a garden, the grandchildren’s spare room? None of that is on a spreadsheet, and all of it decides whether a move feels like a release or a loss.

Option two (UK): equity release

Equity release, MoneyHelper says, “is a type of mortgage that lets you access the money tied up in the value of your home” without selling it. A lifetime mortgage is a loan secured on your home; interest rolls up and the lot is repaid when you die, move into long-term care or sell. You still own the house. Age UK gives the minimum age as 55 for most products. A home reversion plan means selling all or part of your home to a provider, generally from age 60, in exchange for living there rent-free for life; Age UK notes the company “doesn’t pay the market rate”.

MoneyHelper says Equity Release Council members must give you the right to stay in your home for life, a no-negative-equity guarantee (you can never owe more than the home is worth) and a fixed or capped rate. Advice is not optional: a specialist, FCA-registered adviser must provide a suitability letter and a Key Facts Illustration first.

The costs, from MoneyHelper and Age UK: application fees of typically £1,500 to £3,000; interest higher than a standard mortgage, compounding for decades; a smaller inheritance, because “equity release reduces the value of your estate”; a possible effect on means-tested benefits such as Pension Credit; and fewer options if you later need to fund care. Anyone else living with you may have to sign a waiver accepting they cannot stay after you die or move into care.

Option two (US): reverse mortgages

The Consumer Financial Protection Bureau describes a reverse mortgage as “a special type of home loan for homeowners who are 62 and older”, with one defining feature: “the amount the homeowner owes goes up, not down, over time”. The most common kind is the Home Equity Conversion Mortgage (HECM), federally insured and, the FTC notes, usually offering “bigger loan advances at a lower total cost than private loans do”. Single-purpose reverse mortgages from state or local agencies are “the least expensive” but limited to uses like repairs.

You keep the obligations of ownership: property taxes, insurance and upkeep. Fail on these, the CFPB warns, and repayment can be demanded. The loan generally falls due when you sell or no longer live in the home.

Costs, per the CFPB: an origination fee of “$6,000 or less”, closing costs, an upfront mortgage insurance premium, then monthly interest, servicing fees and an annual insurance premium “equal to 0.5% of the outstanding mortgage balance”, all added to what you owe. Its summary: “a reverse mortgage loan is more expensive than other home loans”.

For a HECM you “must meet with a counselor from an independent government-approved housing counseling agency first”; the FTC says this typically costs around $125. Ask about the Total Annual Loan Cost rate, whether the rate is fixed or variable, and what happens if you repay early. The FTC’s warning signs: a salesperson rushing you, pushing another product such as an annuity, or painting disaster scenarios.

The questions to ask before any of the three

• What is the money for, and is there a cheaper way to get it (a lodger, a smaller loan, working a little longer)?
• What will this do to my benefits, and to my estate?
• If I need to move, or fund care, in ten years, what happens?
• Who is advising me, are they regulated or approved, and how are they paid?

If you are unsure whether money is even the problem, start with the one-page picture in our complete guide to money after 50; housing decisions are often cashflow decisions in disguise, and the Money Reset workbook walks that through. If the real issue is a fixed income, try living well on less after 50 first.

This week

1. Write down, in one sentence, why you want money out of the house.
2. Price a move properly: both sets of fees, tax and removals.
3. If equity release or a reverse mortgage still appeals, book HUD-approved counselling (US) or an FCA-registered equity release adviser (UK) before any lender.
4. Tell the people your estate affects.
5. Give it a month.