Is downsizing to a smaller home best for you?
With property prices having risen significantly in the past year, retired homeowners may be lured to downsize to some smaller home, unlocking a big lump sum in the process.
Downsizing can sometimes make financial sense, but using the leap is not a straightforward decision, with the emotional weight of leaving the household home along with a shortage of quality smaller properties among the reasons people stay there for extended.
Here, we explain the important thing things to consider if you’re thinking about downsizing now or perhaps in the future.
Homeowners split on whether to downsize
A survey of 2,000 homeowners by Hargreaves Lansdown has found that many individuals are unsure whether or not they should downsize to some smaller home in retirement.
22% of respondents to the survey said they intended to downsize, while 34% said they wouldn’t. The rest of the 44% were on the fence.
Nathan Long of Hargreaves Lansdown says: ‘Done correctly, downsizing is a great solution for any wealthier and fewer stressful retirement. But when you do not plan carefully, you could wind up backed into a corner, with less money, less space and less flexibility than you'll need.
‘Few people relish leaving a place where they're comfortable, leaving a home in which they have built up an eternity of memories, or moving to a smaller house where there is no room for that grandchildren.’
Reasons for downsizing
There are many reasons why homeowners choose to move to a smaller home in retirement – and for many the first consideration is financial. Downsizing can unlock a substantial amount of cash, perhaps to go towards funding your retirement or assisting members of the family.
Practicality is yet another huge factor. When Which? surveyed homeowners who’d recently downsized in 2021, half of respondents told us they accomplished it because their home had become too big for them.
Finally, many people downsize included in longer-term planning. Some readers told us they desired to ‘move before they need to move’, based on the probability of needing a more accessible home or greater care in the future.
The downsides of downsizing
Some of the most popular barriers to downsizing are emotional rather than financial, with 38% of respondents to Hargreaves Lansdown’s survey saying they are too attached to their current home to leave it.
Finances also play a part: 30% said they’d are able to afford in retirement without downsizing; but, at the other end from the scale, 11% said they didn’t think selling their house would release enough money to make downsizing worthwhile.
The process of moving house is expensive, which is a substantial barrier for homeowners living in areas with lower house prices.
Nathan Long says: ‘Downsizers who are counting on it to fund retirement face serious risks. The amounts freed up when downsizing are surprisingly low, once moving costs, fees and taxes – plus any renovation and improvements around the new property – are taken into account.’
The problem with smaller homes
Quality smaller homes can be few and far between, and the best come at a premium price.
Our survey discovered that four in 10 people want to proceed to a bungalow when they downsize, but this is much easier said than can be done.
Bungalows made up 15% of homes built in 1987. However, by 2021 this had fallen to simply 1.6%, with bungalows comprising only 1,942 from the 123,151 homes built-in the UK this past year, according to the National House Building Council.
Ultimately, this scarcity leads to higher costs. Data from Rightmove shows bungalows cost 16% more than equivalent-sized houses with two or more floors.
Buying a flat inside a purpose-built retirement village may also be a choice, however it can be costly once the purchase price and continuing service charges are considered.
Are savings on household bills worthwhile?
Moving to some smaller home can reduce the month-to-month living costs, as a smaller property should theoretically be cheaper to run.
Council tax is likely to be the biggest helping you save make when moving to some smaller home. By moving to some property two council tax bands less than your present one (for example moving from a Band F to Band D), you could save as much as lb800 a year, or lb400 if you drop one band.
Savings on utility bills are less clear cut, as they’re heavily dependent on the age and condition of the property as well as your own energy usage.
Downsizing to produce cash: could it be worth it?
Releasing funds are a big motivation for individuals downsizing, but whether it’s worthwhile will depend on the difference between your worth of your present property and also the overall cost of buying an inferior one.
Research by Pension Bee found that you could release an average of lb145,000 when moving from a four-bedroom property to some three-bedroom one, or lb251,000 by moving to some two-bedroom home.
As you may imagine, however, the yields vary significantly based on where you reside in the united kingdom.
Downsizers selling expensive homes in London could unlock around lb417,000, however this is an outlier. The east of England is the second best spot to downsize, with savings of lb202,000, while Northern Ireland is the least lucrative, with savings of just lb66,000.
It’s also important to element in the cost of stamp duty when it comes to moving house, which can encounter tens of thousands of pounds.
To downsize or not to downsize?
If you’re thinking of downsizing, it’s vital to take your time and do plenty of research prior to making the leap.
Which? is here to help. Like a starting place, take a look at our guide on the pros and cons of downsizing, which goes into greater detail about the key considerations and financial implications of creating the move.
Our guide on downsizing options can help you get to grips with the kinds of properties that might be available, while our case studies can help you find out more about the real-life implications of making the move.
