Is downsizing the right move for you?

Downsizing could be the solution to a house that’s become too big or costly to maintain. It might be 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.

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 close to or in retirement, aware they’re getting older, and may not be able to keep on top of a large 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. 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

One trend increasingly being seen in the market is older people joining forces with their children who have outgrown their current property to buy something they can all live in together

This can be mutually beneficial – the children upsize, with the help of money from their parents. And the parents downsize or at least have shared responsibility for a bigger home.”

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

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

Divorce or separation from a life partner can be particularly stressful and difficult. Being single again can mean major changes to your financial situation, plus implications for 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 good idea. Getting a mortgage after splitting up

Many borrowers wrongly assume that all mortgages are portable, and you can use the same mortgage on the same terms for a new property. But this often won’t be the case.

If you are applying for a new mortgage as a single person you will 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 is likely to have a number of mortgage options, including capital repayment, interest-only and lifetime mortgages*, which is a form of equity release.

Typically you might 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.

But these are complex financial arrangements and it is important to weigh up the pros and cons and be fully confident you know how it works.

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

Can I release equity and still stay in my home?

Equity release* can be an option if you don’t want to downsize. Many people decide the would rather stay in familiar surroundings and community for as long as possible. Equity release may allow you to do this, releasing funds to supplement pensions income.  

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?

While downsizing is often done with cost saving in mind, there are still fees and costs associated with a move.

“Stamp duty land tax can put many people off downsizing,” says Marcia Banner, Tax and Trust Specialist at St. James’s Place (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. If you are replacing your main residence, this tax can feel like an unpalatable expense."

There’s no stamp duty on the first £125,000 of the purchase price for main residences, but tiered stamp duty rates apply on the value of a property purchase over and above this level.

For the value between £125,001 and £250,000 you’ll pay 2%, and for property value between £250,001 and £925,001 the rate is 5%, while value between £925,001 and £1.5m is charged at 10%, and value above £1.5m is taxed at 12%.

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 there will be 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.

Ideally you shouldn’t feel rushed into this decision. Talking things through with a trusted friend or your financial adviser can help bring clarity to the situation and help you weigh up the pros and cons. This way you can move forward with confidence.

Will downsizing affect IHT on my estate?

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.

It can be helpful to 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 are factored in.

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.

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