The Pros & Cons Of Downsizing

This week’s podcast looks at the pros and cons of downsizing. Joining Craig is equity release specialist, Mark Thompson.

Downsizing is becoming less popular as people grow older. Everybody’s circumstances and personal circumstances are different. Downsizing isn’t right for everybody, so we wanted to share our views on the pros and cons, to help people make their own decision.

What is downsizing and why do people choose to do it?

Downsizing isn’t necessarily selling your home to buy a smaller property. It might be choosing something cheaper. But generally speaking, people downsize because they’ve got too much space in the house.

Years ago as an estate agent I saw it all the time – the children went off to university and flown the nest. People wanted valuations because they no longer need four or five bedrooms any more – they only need two or three.

As you get older, you don’t want the cost of looking after a larger home – especially now with the price of heating bills. There’s also the toll on your own personal energy in maintaining a larger home and garden.

Lack of available properties

Traditionally, everybody would look to downsize to a bungalow and have everything on one level  – but not enough bungalows have been built in the last 40 years. They’re not a cost effective thing to build, so they are in short supply.

Lack of housing stock and increased demand means that the price of bungalows have gone up. You might struggle to find the property that you’re looking for, or pay more than you were expecting to for the home you want.

Stress of moving

Moving home is one the most stressful things you can do in life. At 65 or 70 years of age you could sell your property within seconds in the current market. But you could struggle to find something that suits your requirements. There’s always the danger that you’re rushed to  buy something that doesn’t suit you.

Converting your home

There are many ways you can convert your existing home. Fewer people aspire to live in a bungalow now because they can get a stair lift, or a lift that goes up in one room. These are a lot cheaper than moving home – especially when you consider legal fees, removal costs, stamp duty and agency fees.

Is downsizing a good way to release money from property?

Some people downsize because they want to move to be near family. But many consider it for financial reasons. As we know, many people have pension shortfalls and decide to take money out of their properties.

The perception is: “I’ve got a £350,000 house, I’ll sell it and buy a £200,000 house, giving me an extra £150,000 to live off.”

But a recent report suggests that it’s not as simple as that. As we’ve discussed on previous podcasts, property is most people’s main capital investment. It’s gone up by 53% in the last ten years. So do you want to downsize that investment? Generally house prices go up and down, but steadily rise over time.

The report suggests we might be financially better off by pulling money out of property with equity release. You still own the house, it’s still in your estate. The property going up in value is still benefiting you. A £350,000 property going up by 10% gives you a lot more return than a £200,000 property. And with inflation where it is, that’s worth having.

Could equity release be a better option?

When we talk to any client about equity release, we illustrate to them the impact of house price growth on their equity over the years. I like to use graphs to show a client the plan they’re looking at and the interest rate on that plan. We look at how that interest will compound up if you don’t pay any interest back (which you can if you choose to).

We also look at the house price – what will happen if it goes up by 1% to 2%, possibly 3%. The interest rates we’ve got at the moment for equity release are historically low. People are quite surprised to find that their equity is hardly being affected. If house prices rise most people feel pretty comfortable when they see the impact of property prices on their equity, even considering the interest.

Seek advice before you downsize

Do get proper advice before you put your house on the market. Don’t just focus on the £150,000 you might get from moving to a smaller home. Think about how long that £150,000 will last. Many people just go with downsizing because they see that as the only option.

But there are other alternatives out there which might be more beneficial for you. By understanding what the options are you can make a better, informed decision.

Moving home is not the only way

Most of us are very tied to our home. We don’t want to move or face the stress and strain of it. I’ve got a client at the moment with two lodgers in his current home – we’re doing a lifetime mortgage for him to pay off his existing loan. He doesn’t want to move, he’s happy where he lives, he’s happy with his lodgers, his lodgers are happy with him.

We’ve found him a plan that works for everybody. The lodgers’ rent will cover his lifetime mortgage. So taking in lodgers is another option if you don’t want to move.

Downsizing could still be a future option

If people do choose to do equity release, and it’s right for them at that particular time, they can still downsize at some point.

It’s one of the Equity Release Council’s standards. You can transfer the loan to another property. There is also downsizing protection. Here, if you decide to move and the property that you want to buy doesn’t meet your lender’s standards, the protection will pay off your existing mortgage without any penalties. Most products have that, although it’s not available to everybody. That’s something we will discuss with you.

It’s very difficult for somebody to know whether they might want to move in five years time. So it’s great to have the option to take the lifetime mortgage to another property in the future.

In conclusion, there are lots of pros and cons to downsizing and, as always, it’s good to get impartial, qualified financial advice from a specialist looking at your specific circumstances.