The term ‘downsizing’ is one mostly known to those at or approaching retirement or those who just don’t need the space anymore. The financial rewards of downsizing are clear: sell your current property, buy a cheaper property and pocket the difference.
A recent study by Key Retirement Solutions has revealed that one in five British homeowners who are over the age of 55 want to downsize and move into a smaller property plus similar research from the National Association of Estate Agent’s (NAEA) September 2013 market report show that 24% of homeowners, are choosing to downsize. It is also estimated over a million homeowners will downsize in the next five years.
Reasons and Benefits of Downsizing
President of the NAEA, Jan HÓ±ytch stated: “Downsizing can be a perfect opportunity for homeowners to raise capital, prioritise what’s important and get rid of any unnecessary clutter.” She also highlighted financial benefits, especially to those who have a lot of empty space: The idea of owning a potentially mortgage-free property or paying less in utility bills certainly appeals to people who no longer need as big of a property.
According to the Key Retirement Solutions research, the driving factor behind the desire to downsize was predominantly financial and homeowners on average hope to make £78,000 through selling their larger properties. 23% of the homeowners surveyed were thinking of downsizing because of financial worries and 19% were anxious that their current properties were too expensive to run in terms of utility bills. Mortgage repayments were also an issue, with a small number of homeowners downsizing, as they were not able to repay their loans.
However, the research also noted that although one in five homeowners wanted to downsize their properties, many were worried about the process of doing so. It was revealed that a significant number (60%) were concerned about the hassle involved in moving and 49% had worries over how much a move would cost. Key Retirement Solutions noted that this was probably because the over 55 age group are likely to have remained in the same property for a number of years, meaning packing and transporting belongings becomes more of a challenge. They also noted that a number of those thinking about downsizing were concerned about the current property market and if their homes would sell for a good market value. See our article on how the average house price for each type of property compares.
The NAEA have comprised a list of top tips for those considering downsizing:
- Remember the basics. Although moving out is a major concern, you cannot forget that you are moving in, too. You want it to feel like home as soon as possible so get gas or electricity plus phone and broadband services sorted as they can also take time to be activated.
- Redirect post and change your address with important companies as soon as possible. Also leave forwarding details at your old address so that the new owners can make sure you receive on any mail.
- Plan what to bring. Downsizing in property can also mean downsizing in ‘stuff’. It can be hard to leave things behind, but sometimes a ruthless attitude is the only way, be honest with yourself. Unpacking can be made easier by labelling boxes for relevant rooms.
- Decide what to do with what you don’t want. With the plan, you should have a clear idea of what you won’t be bringing into your new house. Rather than leaving the disposal of this to the last minute, be wise and eco-friendly by recycling and selling your unwanted things. Large items can be collected from your home for free on various websites and your local National Association of Valuers and Auctioneers (NAVA) auctioneer will help to give advice on how best to go about it, and could even organise the sale of all your items. If the ruthless approach is too daunting for you, consider putting the ‘maybe’ items into storage. You can then allow yourself to settle into your new home, and reassess whether you still want the additional items.
- Have a floor plan and measure Rather than dumping items randomly in your new home, plan ahead by using a floor plan of your new home to assess how everything will fit. Even more precisely, measure your furniture to guarantee that everything will fit smoothly.
- Check the energy efficiency of your new home first. An energy bill reduction is a definite positive to downsizing, and this should be factored in to your decision.
- Make the most of your new property. It can be easy to arrange things in a way that is familiar, so you essentially end up moving in to a smaller version of your old home. If this is what you like, that’s fine. But consider an exciting change by mixing things up, making your house more space-efficient and choosing a stylish layout.
Disadvantages of downsizing
It sounds simple but the concept of downsizing ignores a number of critical factors:
1. Many people have a connection to their home
2. There are significant costs involved in moving
3. Property prices are going up significantly
4. Moving is considered to be one of life’s biggest hassles
5. You rarely get back the investment you have made in decorating and modifying your home.
Whilst downsizing is the go-to idea for those needing extra capital to make their retirement go smoothly, ignoring the above critical factors can lead to anxiety and disappointment.The very features, decoration, belongings and furniture that turn your bricks and mortar from a property into a home are often designed to fit both your personal taste and the property they reside in.That which you leave behind – kitchens, fittings, carpets, garden features – will rarely get you a full return on investment in the form of your property price.
When you move to a new property, there may be stamp duty to pay, moving costs and the investment required to get the property up to your standards and make it a home.It’s important to consider that stamp duty ranges from 0%-7% of the purchase price and estate agent fees are usually 1-3% of the sale price plus VAT. A report by Lloyds TSB found that the total average cost of moving was a staggering £8,922.
Putting aside the costs of moving, it’s important to consider the cost of moving down the property ladder when house prices are significantly on the rise.Consider a £200,000 home growing at 5% a year. After 10 years the property will be worth £325,779. If you were to downsize to a £150,000 property, in 10 years that property will be worth £224,334.In this scenario, you would be missing out on £101,445 of property price growth. After the fees of £8,922 you would have received £41,078 from the £50,000 difference in property value when you downsized.
Alternative to downsizing
If you have the need for capital now, one alternative to downsizing is to stay in your property, continue to own it 100% and take out a lifetime mortgage for the amount you require.
There is interest to pay on the lifetime mortgage, but in a market where prices are going up, this can be offset by potential future house price growth. It also means you get to stay in the property that you have turned into a home and don’t have the associated hassles of moving.
For an estimate of how much your property is currently worth, use our free Online Valuation Tool today.