Equity release or downsizing to pay for later life?

By CareFinder Team · Published 2026-06-30 · Last reviewed 2026-09-18

Downsizing means selling your home and buying somewhere cheaper, releasing cash with no debt, but it involves moving and costs such as stamp duty and fees. Equity release lets you stay put by borrowing against your home or selling part of it, but interest usually compounds and reduces what you leave. For care costs specifically, a council deferred payment agreement may be cheaper than either.

Downsizing and equity release both turn the value of your home into money you can spend, but they work in opposite ways. Downsizing means selling and moving somewhere cheaper, so you keep the difference with no debt. Equity release lets you stay in your home, but the amount owed usually grows over time, leaving less for your family.

If the goal is paying care home fees, there is also a third option many people miss: a deferred payment agreement with the council. This article compares all three.

How does downsizing work?

You sell your current home and buy, or rent, a smaller or cheaper property. The difference, after costs, is yours to spend or save.

Advantages

• No loan and no interest: the money is simply yours.
• A smaller home is often cheaper to heat, insure and maintain.
• Moving earlier, while well, can mean choosing a home that suits later life, such as a bungalow, retirement housing or somewhere closer to family.

Disadvantages

• Moving is costly: estate agent and legal fees, removals, and property purchase tax.
• Purchase tax differs by nation: Stamp Duty Land Tax in England and Northern Ireland, Land and Buildings Transaction Tax in Scotland, and Land Transaction Tax in Wales. Check the current rates before you budget.
• It can be emotionally hard to leave a long-term home and neighbours.
• The price gap between homes may be smaller than expected once costs are deducted.

How does equity release work?

Equity release lets homeowners, usually aged 55 or over, take money from their home without moving. Age UK describes two main types:

• Lifetime mortgage. A loan secured on your home. You can take a lump sum or draw money in stages. Interest is usually added to the loan and compounds, so the debt grows over time. The loan is repaid, normally from the sale of the home, when the last borrower dies or moves into long-term care.
• Home reversion. You sell part or all of your home to a provider, usually for less than market value, and keep the right to live there for life. These plans generally start at 60.

Providers that are members of the Equity Release Council guarantee that you will never owe more than the value of your home when it is sold.

Advantages

• You stay in your home.
• You can choose a lump sum or smaller amounts over time.
• Some plans let you pay the interest to stop the debt growing.

Disadvantages

• Compound interest can take a large share of the home's value over a long period.
• There may be early repayment charges if you want to move or repay.
• It reduces what you can leave in your will.
• It usually costs more than an ordinary mortgage.

What about a deferred payment agreement?

In England, if someone moves permanently into a care home and their home is counted in the council's financial assessment, the council must offer a deferred payment agreement to people who meet the criteria. The council pays the care home fees, or lends the money, and recovers what is owed when the home is sold, which can be after death. The NHS guide to paying for your own care lists it, along with renting out the home, as an alternative to selling straight away.

Key points from the Care and Support Statutory Guidance:

• To qualify, a person must need care in a care home and have savings and other assets, excluding the home, at or below the upper capital limit.
• Councils can charge interest, but it cannot exceed a national maximum that is reset every six months.
• The amount that can be deferred is capped at an equity limit that leaves some value in the property.

Wales has its own deferred payment scheme. In Scotland and Northern Ireland, ask the council or Health and Social Care Trust what arrangements are available. For care costs, this option is usually worth comparing with equity release before signing anything.

How do these options affect benefits and care funding?

Means-tested benefits. Cash released through equity release or downsizing is capital. Holding it can reduce or stop means-tested benefits such as Pension Credit, Housing Benefit or Council Tax Reduction. Age UK notes that if the council helps pay for care at home, it may start charging or ask for more.

Council financial assessment. Money in the bank counts as capital when the council assesses what someone should pay towards care. While your home is disregarded for care at home, cash released from it is not.

Giving the money away. Gifting released cash to children to reduce the value of your estate can be treated as deliberate deprivation of assets if the council believes avoiding care charges was a significant reason for the timing. You could then be assessed as if you still had the money.

Which option suits which situation?

What should you do before deciding?

1. Ask the council for a needs assessment and financial assessment if care is involved. The outcome may change which option makes sense.
2. Check whether anyone else living in the home affects how it is treated.
3. Get estimates for all moving costs, not just the sale price.
4. For equity release, take advice from a specialist equity release adviser authorised by the Financial Conduct Authority, and involve your family.
5. Check how any cash will affect benefits before you receive it.

This is general information rather than advice. Equity release in particular is a long-term commitment and must be arranged through a regulated adviser. A solicitor can help with property and will-related questions.

Frequently asked questions

Can equity release be used to pay care home fees?

Yes, but it is often not the best choice. When someone moves permanently into a care home in England, a council deferred payment agreement may be cheaper, and a lifetime mortgage usually has to be repaid once the last borrower moves into long-term care.

Will downsizing affect my Pension Credit?

It may. Money left over after buying a cheaper home counts as capital, and savings above certain levels reduce Pension Credit. Check the current rules on GOV.UK before the sale completes.

Can I leave my home to my children if I take equity release?

You can still leave the home in your will, but the loan and rolled-up interest are repaid first, usually from the sale. Your children receive whatever is left, which may be much less than the home's value.

Is it deprivation of assets to downsize?

Selling and moving to a cheaper home is not in itself deprivation. Giving away the released money, or spending it in a way that is out of character, could be treated as deprivation if avoiding care charges was a significant motivation at the time.

Do I need advice for equity release?

Yes. Equity release must be arranged through an adviser authorised by the Financial Conduct Authority, and Equity Release Council members also require you to have independent legal advice.

Key takeaways

• Downsizing releases cash with no debt, but moving has real costs and purchase tax varies by nation.
• Equity release lets you stay at home, but interest usually compounds and reduces your estate.
• For care home fees in England, compare a council deferred payment agreement first.
• Released cash can reduce means-tested benefits and counts in a financial assessment.
• Take regulated advice before any equity release, and involve family early.