• News
12 Mar 2024
5 min read
Kip Katesmark
Contributor

Taking financial advice can help make sure you downsize at the right time, and for the right reasons.

people moving house

At a glance

Downsizing to a smaller, more manageable property can make life simpler and cheaper.

The thought of downsizing is a more frequent reality for many – in response to a change in circumstance, to release cash to spend on yourself or for supporting loved ones.

Always take financial advice to ensure you know all your downsizing options – you may have more options than you imagine.

Downsizing. It could be the solution to a house that’s become too big or costly to maintain. Or the way to release money to live your retirement to the full, or even help out your children. It could mark the beginning of a brand new single life if you’re starting over.

Every downsizer has a valid reason for selling up and sizing down. But whatever your reasons, money – either the need to save it or find more of it – is usually the driving factor.

In this article, we'll explore the advantages and disadvantages of downsizing, when it's a good idea to downsize, and how to make sure you do it right.

Why downsize?

  • You are an empty nester and would rather have less bedrooms and more money to spend in your retirement.

  • Your property or family home is becoming too hard to manage or costing too much to run.

  • You’re recently separated from a long-term partner, spouse or civil partner or are recently bereaved.

  • You want to release a lump sum to spend on yourself, or your family.

Whatever your reasons, there are financial pros and cons to consider carefully before you make a move that you can’t undo.

Downsizing for your retirement

One day the house seems to burst at the seams with football kit and school bags, and the next you’re rattling around a house that feels too large for two – or even one.

Most downsizers are around 65, aware they’re getting older and worry that they won’t be able to keep on top of a larger property and garden. Family homes often come with high maintenance and running costs, especially energy bills.

Downsizing in these circumstances is often the right move. If you downsize to a more age-appropriate property, you may be able to pay off any remaining mortgage and release a significant lump sum at the same time.

Getting a mortgage in later life

Some people will find that they still need a loan of some sort to downsize. There are three popular mortgage options for people in later life: a capital repayment or interest-only mortgage in retirement, retirement interest-only mortgages (RIOs) and equity release mortgages, which allow you to stay in your own home if you decide against downsizing.

A retirement interest-only mortgage, or RIO, is a hybrid between a regular mortgage and an equity release* mortgage. You pay off the interest, but not the capital and it runs until you or your surviving partner die or move into a care home.

At that point, the mortgage is then repaid from the sale of the property; with the remaining equity paid to your beneficiaries.

The sheer variety of mortgages can sound bewildering, but we can help you find the best one for you.

*This is a lifetime mortgage. To understand the features and risks associated with such products, please ask for a personalised illustration.

Upsizing to downsize – a new option for later life living

Paul Johnson is SJP’s Head of Mortgages, Development and Technical Consultancy. He’s seeing a new trend in the market – older people looking to downsize joining forces with their children who have outgrown their current property.

“There’s a rise in older people selling up and moving in with their children, especially in the last 18 months.

“It’s mutually beneficial – the children upsize, with the help of money from their parents. And the parents downsize.”

At the same time, money is flowing between generations too, which can benefit the financial wellbeing of the whole family.

“Looking at financial planning from the point of view of the whole family can make a lot of sense,” says Paul. “Plus – built-in babysitters!”

There are some tax implications involved in this option, so you should always talk to a financial adviser as a family, before starting to look for the perfect family home with an annexe.

Downsizing following a change in your relationships

Whatever the circumstances, divorce or separation from a life partner is never easy. Being single again can mean major changes to your financial situation and any joint property holdings.

Most newly-single people need to downsize for economic reasons, and will need to find a mortgage, so talking to a financial adviser as soon as you are talking with a solicitor is a very good idea. It can be especially difficult to think straight in these circumstances so you know all your options, and their long-term effect on your financial security.

Getting a mortgage after splitting up

One of the most common assumptions in this situation, says Paul, is that all mortgages are portable, and you can use the same mortgage on the same terms for a new property. Buyer beware.

“It’s not safe to assume that you can ‘port’ or carry that mortgage over to a new property.

“You may well have to go through a full re-evaluation of your circumstances, so the lenders can assess if you can afford the new property on your revised income.”

Someone who’s newly single has a number of mortgage options.

“There’s the standard interest only mortgage, which runs until a set age.

We also see a lot newly divorced or separated individuals opting for lifetime mortgages which is a popular form of equity release mortgage.

“You can use a lifetime mortgage to help purchase a property if you have a sizeable deposit after a separation, but not enough to buy a property outright. You don’t pay interest on a lifetime mortgage but the interest you would have paid rolls up on the mortgage.”

“You’ve got to be careful, because that ‘rolled up’ interest can mean that the amount you owe on the property could double every 10 years.

“That could leave your beneficiaries with a big bill down the line.”

Always talk to an adviser if you’re considering this option and talk to your family too. Our mortgage calculator can help you estimate how much you could borrow.

Sell your house before you downsize

Paul’s key advice for anyone downsizing is ‘sell before you buy.’

“The main downside we see is people jumping the gun – falling in love with a house before they've sold their other property.

“They want to downsize to but can’t sell their current one, so they take out a bridging loan. Used correctly, they’re a good way to bridge the gap between one property and the other.

“But bridging loans can be more expensive than standard mortgages, and there may be hidden charges when you repay the loan. These can be punitive.”

If you can rent, or stay with family whilst you look, you won’t feel rushed into a costly decision. You’ll be a cash buyer too, giving you a head start in the market.

Can I release equity and still stay in my home?

Equity release can be another option if you don’t want to downsize. Many of us would far rather stay in familiar surroundings and community for as long as possible – and equity release may allow you to have the best of both worlds. 

An equity release mortgage means you are borrowing money against the value of your home. 

You don’t have to make any repayments to the lender (although some equity release mortgages allow you to do so) but interest accrues during the term of the mortgage. This is ‘rolled up’ over the lifetime of the mortgage, and the final sum is repaid on the sale of your home when you die or move into care. 

Are there downsides to downsizing?

Then there’s the cost of downsizing, which can quickly add up.

“Stamp duty land tax can put many people off downsizing,” says Marcia Banner, Tax and Trust specialist at SJP. “It can feel like throwing money down the drain as the amount due can be quite substantial for those who are not first-time buyers."

There’s no stamp duty on the first £250,000 of the purchase price, but between £250,001 and £925,000 you’ll pay 5%, and for properties costing between £925,001 and £1.5m, you'll pay 10% on the portion above £925,001; while anything above £1.5m is taxed at 12%.

“Someone downsizing from a relatively high value property (of say £1m or more), could easily be looking at £20,000 in stamp duty land tax as a result of a downsize," says Marcia.

“If you are replacing your main residence, this tax can feel like an unpalatable expense.”

What other downsizing costs should I factor in?

Any house moves comes with additional costs. From estate agent fees to the cost of a solicitor, the survey (and any remedial work) and moving costs themselves. Plus conveyancing on top.

Moving costs could add another £1,000 or more. And you may well need to dispose of some furniture or put it into storage. All at a cost.

Don’t underestimate the emotional cost of downsizing

Moving from your family home can be traumatic. Packing up a lifetime of memories and moving to a different area to make a fresh start can be especially hard if you’re doing it on your own.

Talking through both your hopes and fears around downsizing with a financial adviser can help you focus on the practical aspects, but also support you emotionally too. Having a financial plan will help you feel confident about your long-term future.

Will downsizing affect my inheritance?

Downsizing can be a great way to save money, or simplify your life, and reduce your home's maintenance and utility costs.

But it does mean you’ll be cashing in what may be your biggest asset or the most significant portion of your legacy – and once it’s done, it’s done.

“The other potential tax implication is possible impact on your eventual inheritance tax liability," says Marcia.

“Most people know about the Residence Nil Rate Band which is an inheritance tax free allowance of £175,00 for a single person, and £350,000 for a couple who are married or in a civil partnership.

“But if you downsize your property and the new property that you buy is lower in value than the Residence Nil Rate Band amount that is potentially available to your estate on death, then you may have forfeited some of your RNRB tax free allowance.” 

That could reduce the amount you eventually pass on to your loved ones. But, Marcia says there is a compensatory tax relief available to those who have downsized on or after 8 July 2015. 

“As a downsizer, you can claim for Downsizing Addition, a tax relief which exists specifically to compensate those who have downsized to a smaller, lower value property (perhaps following death of a spouse) and have lost out on some residence nil rate band as a result.”

“The rules are quite complex but in essence, provided that you leave other assets to the value of the lost residence nil rate band outright to children, grandchildren or other qualifying beneficiaries, downsizing relief can ensure that your inheritance tax liability is not increased as a result of a downsizing move and your legacy is preserved.

Talk to your family

Downsizing can have a knock-on effect on the whole family.

Take a deep breath and explain to your children why you’re thinking of downsizing. They may be relieved that you’re simplifying life and won’t be climbing ladders to prune the apple tree anymore. And if you’re planning to use some of the money to fund later life care, it’ll be a weight off everyone’s mind to know that the costs have been planned for.

However, children have a natural attachment to the house where they grew up and can become emotional about its sale. They may also have been hoping to inherit the house, or to have a share in it as part of their inheritance.

In our experience, it can help to have a financial adviser in the room for some of these conversations. We can be objective about the outcome, but sensitive to the different viewpoints of family members, and make sure everybody’s point of view is heard.

Downsizing is your decision. But it should always be a family conversation.

Downsizing and the value of financial advice

Downsizing done right can make all the difference to your financial wellbeing and quality of life.

Whatever your situation or reasons for considering a downsize, always take financial advice well ahead. Many of our advisers are qualified later life financial advisers and we’ve helped guide many clients through this major life change.

Whether you downsize or stay put, we’ll help you live in the right home for you, for as long as you want.

Your home may be repossessed if you do not keep up repayments on your mortgage.

About the author
Kip Katesmark
About the author

Kip Katesmark is a former Creative Director for BBC 2 and BBC News and Director of Creative for Discovery Networks UK where she led award-winning television and radio campaigns. She has written and reported for BBC World Service and BBC Radio 4, as well as internationally for Canadian Broadcasting and National Public Radio in the USA. She writes and reports on all consumer issues.

SJP Approved 12/03/2024