Many of my clients speak to me about ‘downsizing’ when we’re creating their retirement strategy. Sometimes it’s a vague concept many years in the future, and sometimes it’s something that they’re actively exploring now.
After the children have left home there often come the thoughts and conversations about whether they still need such a big house, and whether they could take advantage of the seemingly astronomic rise in house prices over the last couple of decades.
Having had a lot of these conversations over the years, the same themes tend to come up again and again.
The action that’s right for you will depend on where you are in your life, what your future plans are, and your financial position.
One thing that I’ve found many people often struggle with, and keeps them rooted in their current house, is the emotional attachment they feel to the property.
It’s the place they brought up their children, the scene of many of life’s big events, and it’s filled with memories. While they know that it’s just bricks and mortar, in reality it’s much more than that.
So even though the place is too big, and it’s expensive and time-consuming to maintain, they’re probably not going to leave just yet. Plus, the kids seem to keep coming back, even when they’re well into their thirties.
But for those who feel it’s the right time to move on, there are a number of options to look at:
· Downsize and release equity
· Downsize without releasing equity
· Keep your current property and rent it out
· Keep your current property and buy a second home
Downsize and release equity
The most common objective, at least at outset, is to sell the family home and buy something smaller and less expensive, and release some of the equity that has built up over the years.
Many of my clients bought their family home in the 1980s or 1990s for less than they paid for their latest car, and have seen the price of the property rise in to the millions. I hear clients tell me again and again that ‘they couldn’t afford to buy their house now’, and often it’s probably true.
They’ve been fortunate (and potentially foresighted) enough to have participated in the largest rise in property prices in history, certainly over such a short period.
So the question is: where are you going to move to?
If you want to stay in the same area, you’re probably going to have to compromise. It can be a bit of a reality check when you start to view properties in your agreed budget. You’ve become used to the size of your current home, and you’re probably using all of the space you have, if not physically then certainly with furniture, personal possessions and general ‘stuff’.
Unless you buy a real renovation project, you may find it difficult to buy somewhere you’re happy with while leaving you with the anticipated amount of cash left over, once the cost of moving has been taken in to account. Proximity to schools and transport tend to push up property prices, so if you live near a school or station you may be able to move to a less well-connected part of your area and get more for your money. But maybe not enough more to make it worthwhile financially.
If you want to move away from your area, or out of London altogether, then you’re much more likely to find an acceptable property while still being able to pocket a good chunk of equity. Since the pandemic I’ve had a lot of clients who are reconsidering their plans, and exploring the opportunity of moving further afield. I think I may soon have to open another office on the south coast because half of my clients will be living there before too long!
You need to be on top of your numbers when calculating the financial benefit of downsizing. There are legal fees, estate agent’s commission and (potentially) stamp duty to pay from the proceeds of your sale, plus removal costs and the inevitable work you’ll want to do to the new property.
Very often my clients will look in to downsizing, and then decide that the drawbacks outweigh the benefits, and decide that, for now, they’ll stay put.
Downsize without releasing equity
If you’re happy to move to a smaller house without releasing any substantial equity in the process, then there can be long-term advantages, nonetheless.
The smaller property will be easier to maintain, and the running costs are likely to be lower.
Again the key is to do your sums, and be aware (and comfortable) in advance that you won’t end up with a significant lump sum after you’ve moved.
Up-size
I’ve had several clients who have moved to a bigger and sometimes more expensive house once the kids have flown the nest.
Sometimes this has been funded from savings, and sometimes by raising a mortgage on the new property. If you’re taking out a mortgage, as I always say, to be financially independent (and therefore able to retire) really you need to be mortgage-free, so it’s an approach I would take with caution when considering your long-term financial position.
But assuming the sums work out, and you have a plan in place to clear the mortgage by the time you want to retire, you could look to buy a really special home, particularly if you are moving from London to the countryside.
With remote working and flexible hours becoming the norm, maybe it feels like the time to make that life-changing move you’ve been dreaming of. And the prospect of swapping a terraced house in London for a manor house in the county is very inviting.
Keep your current property and rent it out
Depending on your appetite for risk, your outlook on property prices, and your personal circumstances, you could find it financially beneficial to keep your current home as a rental property, and buy another property to live in.
A common way to do this is to raise a mortgage on your current home and buy a new property using the capital that you raise (plus potentially a further mortgage on the new property)
This is known as a ‘let to buy’, i.e. you let your current property and buy one a new one as your main home.
If the figures work out, the rental income generated on your current home is enough to pay the mortgage that you raise (plus potentially more, giving you a profit each month), while the equity that you raise is enough to buy your new home, either outright, or with a mortgage.
This will only really work for those who have a significant amount of equity in their current home.
You need to go in with eyes wide open. As well as the financial risks (such as periods without a tenant, tenants not paying their rent, and the general risk that comes with having a large mortgage), there are emotional risks involved.
You need to think about how you’ll feel to rent out what is currently your family home, and how you’ll feel if the tenants don’t take care of the property. It’s been your home for a long time, and you may have a person attachment to the kitchen, bathroom, decoration and fixtures, that you probably wouldn’t have if you’d renovated a property with the sole intention of renting it out.
But if you are comfortable with the financial and emotional risks, it can be a very profitable strategy, both in the short- and long-term.
Keep your current property and buy a second home
For those who are looking for the best of both worlds, and who have the resources to afford it, this is a popular option.
Some people use their family home as their main residence and buy a smaller place in the country or on the coast to use at weekends and for extended visits. Others look to use their country pad as their main residence and use their London home as their base in town.
Again, you need to on top of your figures to make sure this is a sustainable lifestyle. As well as funding the purchase you’ll have to take in to account the costs of running two properties, including council tax and utility bills.
If you use your savings to fund the purchase, then that’s money that’s been taken from your long-term financial plan, and will need to be taken in to account when assessing your ability to become financially independent.
The other option is to re-mortgage your family home to release equity, potentially with a further mortgage on the second property. This will be a drain on your monthly income and again it may affect your long-term planning.
You also need to be aware that while your main residence is exempt from capital gains tax on any rise in prices, second homes aren’t. So you need to take advice about which property you class as your main residence, as the tax consequences can be significant when you come to sell.
Ultimately, the decision you make will reflect the attachment you feel to your family home, your willingness to compromise, and your desire for a fresh start. Whatever option you take, make sure you do your sums and understand exactly what position you’ll be in at the end of it.