Downsizing and your finances

More than two million people over the age of 55 intend to raise extra cash for their retirement and for one-off purchases by downsizing to a smaller property.

Homeowners are hoping to raise more than £85,000 on average by selling their homes and buying a cheaper property with the proceeds, a survey by Prudential has found.

What is downsizing really like? Annie Shaw shares her experience... 

Why do people downsize?

It can make particular sense for “empty nesters” who don’t need as much space now their children have left home and can use the equity raised to boost their income once they have quit the workforce.

There are others being forced to downsize because banks are refusing them mortgages. One in three over-50s sill has a mortgage, according to a recent Saga survey. Yet mortgage companies are becoming less willing to lend to people as they get older, meaning that some have no choice but to sell up.

If you are thinking about downsizing, here’s what you need to know:

Choose the best location

Downsizing works best if you own a pricey property and plan to relocate to a more affordable region. Those in the driving seat are homeowners in London and the south east moving to the country.

The price gap is as wide as it’s been for many years, say experts. For everyone else in the country, it might not be possible to stay in the same area, so prepare yourself to move away a little. A home half the size won’t be half the price in the same neighbourhood.

Read our top tips for downsizing.

Know the market

Bungalows and retirement flats may be more expensive than you think, partly due to competition from all those other people selling up in later life. Make sure you do your homework before you start on what you can afford and where.

Tax and Stamp duty

Provided you are selling your main home, you won't have to pay capital gains tax but there will be stamp duty to pay – on properties over £125,000 – as well as legal costs for conveyancing.

Plan how to invest your money

After the house is sold and you are settled into your new pad, you then have to decide what to do with the profit you have made. 

Placing it in a cash savings account is not a good home for your windfall with interest rates so low. Experts urge people to take a more long-term view and invest in equities.

Revisit your Will

Any big change in circumstances will give rise to the need to revisit your Will. A new property might prompt you to look at a number of measures to avoid or cut inheritance tax, such as couples becoming tenants in common rather than joint owners. With tenants in common each owns a set share – this can either be half each, or a defined percentage.

If you own your home as joint tenants, then if one partner dies, the other automatically becomes the sole owner of the home.

With tenants in common, one member of a couple can pass on their share of the home on death, say to their children, while the other member of the couple can continue to live there, passing on their half on death

Tenants in common can also prevent you having to sell your home if you need to go into long-term care.

What else do you need to consider when downsizing? Find out more...

Is Equity Release right for you? Find out more here