Is downsizing the only option?

The term ‘downsizing’ is one mostly known to those at or approaching retirement. The financial rewards of downsizing are clear: sell your current property, buy a cheaper property and pocket the difference.

It sounds simple but the concept 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. Be sure to consider whether equity release is a suitable option for you.

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.

scalesWhen 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 a rung 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.

If you have a 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.