Should You Downsize in Retirement?
Downsizing is when someone moves to a smaller or less valuable property. There are many reasons you may consider downsizing in retirement, and we will cover these later on.
The main reason people decide to downsize is that it can improve their financial situation. If you move into a less valuable property, not only will your mortgage repayments be lower, but your bills are likely to be lower too.
This means that downsizing can be the perfect opportunity for homeowners to boost their finances and have more money available for important things such as education, home improvements, and savings.
Another reason people choose to downsize is that their property is too big for them, so there is no reason to be paying out more money to live there.
This may be the case if their children have moved out, if they bought a large house and then found it too large to maintain, or if they have gone through a separation and now live alone.
By downsizing, they get to move into a property that is a suitable size for them, which can reduce stress when it comes to maintenance e.g. housework and DIY (1).
It can also save them money due to the lower bills and mortgage repayments.
Downsizing is also a great idea if your home is more valuable now than it was when you bought it. This is because the additional money would be offered to you, and you could spend it on anything you want, from luxury holidays to debt repayments.
Finally, some people are not content in the area they live in, and downsizing is an opportunity to explore areas that are more suitable for them. This may be areas that are more rural and therefore more peaceful, more urban and therefore have more entertainment, or simply a location that is close to family.
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When is the Best Time to Downsize?
If you believe you would be happier in a smaller property, with extra money from the equity you release, downsizing is right for you. It does not matter which stage of life you are in.
Having said that, retirement is a particularly good time to downsize. Many pensioners are living in properties that are larger than they need, as their children have moved out and therefore they have additional rooms that aren’t being used.
Downsizing in retirement is also a good idea as you can move into a property that is fit for people in later life, such as a property with one floor, or one with a stair lift.
Another example would be a property with large rooms and minimal furniture. This can keep you safer in your home, and it saves you money on home improvements in years to come.
Moreover, there are a lot of pensioners who are struggling to afford their lifestyle, and as they do not work, they cannot rely on employment income each month. Downsizing can help them to avoid poverty as they will be paying less on their mortgage and bills, and they may be able to benefit from surplus funds.
Finally, if you are retired and you do not live near your family, it would be a great idea to downsize and move to a property that is close to your loved ones. This could lead to a happier retirement, and it would also come in handy if you ever needed care.
As well as retirement, downsizing can be beneficial when your children have moved out, even if you are still going to be working for a long time after this. This is because you may benefit from a house that is easier to maintain, and you may not need all the space you have.
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Reasons to Avoid Downsizing in Retirement
Firstly, if you are happy with the size and location of your home, it would be illogical to downsize. It’s important that you are in your preferred property throughout retirement, as it will only get harder to move as you get older, so avoid downsizing if you are content where you are.
Secondly, if your property is already very low in value, you may choose not to downsize as you would struggle to find a smaller property that still met your needs. What’s more, you would be unlikely to get equity from downsizing, so this is another reason you may decide it wouldn’t be worth it.
Furthermore, if you do not feel up to moving house, you may decide that you are better off staying where you are. It is well known that moving house is very stressful, so it can be particularly challenging for pensioners, especially if you have a disability.
Some people have built a community where they live, and they do not desire to move home as they would have to leave their friends and family behind.
As well as this, they may have adapted to the amenities around them, such as going to particular cafés and shopping at particular supermarkets.
If you need plenty of space in your home, downsizing is potentially something to avoid. You may have family to stay frequently, and therefore you need spare rooms, or you may need lots of storage space for the possessions you have gathered over the years.
Finally, it goes without saying that moving house costs money. Not everyone is in the position to afford this, especially if they are not going to release much equity by downsizing.
You would have to pay for things like surveys, conveyancing fees and estate agent fees, whereas staying in your current home would not involve these costs.
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Should You Downsize in Retirement?
Deciding whether you should downsize in retirement is entirely personal. It is neither totally positive nor totally negative, as it affects everyone in different ways.
When you are making the decision, you need to consider some of the following things:
1. Are you happy in your home?
This may seem like an obvious question, but we encourage you to spend time thinking about whether you are content where you are, or whether you wouldn’t mind leaving.
As you dwell on this, think about the things that define your experience of your home, such as its location, size, layout, and value.
2. Could you afford to downsize?
If you cannot afford to downsize, there is no point considering it, unless you look to loans as a way of funding it.
This may seem like a silly question as downsizing can allow you to release more money, but you need to find out whether you would be releasing enough equity for the moving costs to be worth it. You should also consider the cost of living in your current location compared to other locations.
3. Would your partner be happy to downsize?
If you are married or living with your partner, you need to have a discussion with them about whether they would like to downsize. There is no point spending time researching downsizing if it turns out that your partner has strong reasons to stay where you are. Instead, raise it with your partner first and work it out together.
4. Do you have the energy to move home?
If you struggle with low energy, whether due to age or a disability, consider whether you would be capable of moving house, or whether it would be too much for you. You could of course pay for help and get family members to help, but either way, moving home is very stressful and requires a lot of energy, so this is something to think about.
5. How much would it cost to live in your new home?
As well as considering the lower mortgage repayments, you should think about whether bills would really be cheaper in your new home, and whether it would be cheaper to live there in general.
If you are moving from a large home in Glasgow to a small home in London, you would still be paying a significantly higher amount to live in the second home, so though it would technically be downsizing, it would not be profitable.
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How Can You Downsize in Retirement?
If you have decided that you would like to downsize in retirement, you may be wondering what your next steps are.
Downsizing works the same way as standard house moves, so all you need to do is follow the usual process of moving house. The only difference is that your intention is to move to a lower-value home, but this does not change the fact that you are still moving house.
However, you may approach downsizing slightly differently to how you approach standard house moving.
This is because you will have less space in the new house, so you need to declutter to ensure all of your possessions will fit into the new property, and you will not have to store a large amount of items as soon as you move.
The best way to do this is to focus on one room at a time to prevent overwhelm. Go through the room and pick out anything you haven’t used in a while or will not use much in the future. Decide whether it would be best going in the bin, going to charity, or going to a friend or family member.
Depending on the size of your new home, you may need to be very ruthless. Make sure you have the measurements for the new home so that you know how much you need to throw out, and how much you can comfortably keep.
Being ruthless also means not purchasing new possessions that you don’t need. Try to be very frugal at this time, as it will only disadvantage you if you don’t have enough space for your new items.
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Things to Keep in Mind When Choosing Your New Location
When choosing your new location, one thing to keep in mind is the amenities that are nearby. If you move to a very rural location, you must take into account the fact that it may be difficult for you to access things like supermarkets and hospitals.
This may not seem like a big deal if you are only 55 and you are healthy enough to travel regularly, but as you get older, you may find it very challenging to live so far away from essential amenities.
Something else you should think about is what the community is like in the area you want to move to.
People usually like to live in bustling communities when they retire, as there is plenty to do each day and there is more opportunity to make new friends. However, if you prefer the quiet life, you might settle for somewhere that is less busy.
Before you make the decision to downsize, research the local community and have a look at the events they have on. You can do this by visiting the location, looking at online resources, and going to pages on social media, such as Facebook pages.
Finally, consider the safety of the place you want to move to. Some people are downsizing as they do not feel safe in their current community, so if you are doing this, make sure you choose a new location that is very safe. You can have a look at crime statistics online, but also speak to locals to find out what their experience has been.
If possible, we would advise moving to a place that has been recommended by others, as you can find out what it is really like to live there, and you can ask for recommendations for things to do in the area e.g. restaurants, hobbies, and shops.
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What are the Alternatives to Downsizing in Retirement?
If you are spending too much on your current property and you would like to have more money for retirement, there are other things you could consider instead of downsizing.
1. Remortgaging
One option is to remortgage your home. This means you get to stay in your property, but you request a different mortgage lender, or a different deal with the same mortgage lender.
Many people choose to do this when their mortgage deal is coming to an end as a way to avoid being put on the standard variable rate, which may be higher than what they have previously been paying. With a new lender or even just a new deal, they may get to access lower interest rates (2).
If your property value has risen since you took out your mortgage, remortgaging may help you to access lower interest rates, as you would have a lower loan-to-value (LTV) ratio.
This applies to many people in retirement; if they bought their home a long time ago, it is likely to be much more valuable now than it was at the time of purchase.
Another reason to remortgage is that certain lenders allow you to make overpayments on your loan, so if you find a lender that allows you to do this, you could end up paying off your mortgage much faster.
Finally, you may want to borrow more money to fund your retirement, and by remortgaging, you could find a lender willing to offer more funds to you than your current lender.
In terms of the disadvantages, remortgaging is not free. You will have to pay fees for conveyancing, property valuation, arrangement, and various other services.
As well as this, you could be charged an early repayment fee, which tends to be 1–5% of your outstanding loan amount, but it can be more or less than this depending on the lender you are with.
Another disadvantage of remortgaging is that you must meet the eligibility criteria of your new mortgage lender. This can be time-consuming, which is particularly frustrating if you recently had to go through the process with your current mortgage lender.
They will check your credit history, loans, and expenses, and if they are not content with what they find, they may refuse to offer you a mortgage deal. For this reason, we advise against remortgaging if you have a bad credit history or a low income.
We also advise against it if you do not have much equity and/or you are not in much debt with your mortgage. This is because remortgaging should not be pursued unless you do not have many other options.
There is no point spending the money on remortgaging if you would be paying off your debts shortly anyway, or if you would not release much equity by doing it.
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2. Taking out a loan
Another option would be to take out a loan in the traditional way. This would be advised if you are currently struggling financially, but you have a steady income that you can rely on, meaning you would be able to repay a loan quickly.
For example, let’s say you have just retired and your partner, who had planned on working for a few more years, has just lost their job and is in search of another one.
In this situation, you know that you will soon recover financially as your partner will secure employment income, but you need financial aid in the meantime to cope with the job loss.
In this situation, you could take out a loan to fund your retirement, and you could repay this when your partner returned to work. This would be a better option than a long-term solution, as you would not have to commit to a scheme that you would only need for a short while.
Another reason taking out a loan is a good way to fund retirement is that it allows you to make a big purchase that you know you will be able to pay back. For example, you may need to pay for home improvements to make your home fit for retirement, and this could be achieved by taking out a loan.
On the other hand, when we talk about funding retirement, we are usually talking long-term. This means that a short-term loan that is used for bridging finance would not be helpful for most people, as they would need permanent solutions, such as downsizing.
This is especially true for people who would not be able to make repayments on their loan as their income is not high enough.
What’s more, it can be harder to borrow money with a traditional loan as you get older, so it is not always possible to use this method as a way of boosting your retirement income. Lenders primarily look at your credit history and income, and if you are no longer earning an employment income, your chances of getting a loan are worse.
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3. Working
If you think you can’t return to work after claiming your State Pension, you’d be wrong. Many pensioners decide to go back to work to fund their retirement, as they quickly realise they have not saved enough money to afford the retirement lifestyle they want.
This is a very stable option as your income is promised, and you will be able to calculate how much you could earn after a set period of time.
For example, you may figure out that if you return to work for five years, you will be able to save enough to have a comfortable retirement, so you can plan for this.
If you are particularly struggling, you would be able to claim your pension funds alongside working. As well as this, you could be putting money into a private pension each month, and the government would top up this money so that you would end up with a larger amount than if you kept the funds in a regular bank account.
The cons of working after retirement are obvious to most people. Retirement is a time to put your own needs first and let go of some responsibilities you have been carrying your whole life. For this reason, some people find that the prospect of returning to work is at best disappointing and at worst, depressing.
Another disadvantage of going back to work would be that you may struggle to find a job that suits your needs.
Manual labour jobs are off the cards for most people in later life, full-time jobs may be too taxing, and it is not guaranteed that your previous workplace would take you back. This can mean that attempting to return to work becomes very stressful.
If you do want to go back to work, perhaps you could consider working just a few days a week, which would top up your income without tiring you out too much or interfering with your retirement lifestyle significantly. You may even find that you enjoy doing this, as it adds some structure to your life.
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4. Budgeting
Most people who are struggling to make ends meet in retirement are already budgeting, and do not need to be told that if only they saved a bit more money, they would have a very comfortable retirement.
We are aware that budgeting can only go so far if you have minimal savings and you are on a low income, but it is certainly worth a mention as a way to increase your retirement funds.
If you create a strict budget and stick to it each month, you could end up saving a lot of money over the months and years.
Think about all the small, insignificant purchases most of us make, such as buying clothes we don’t need and buying food when we are out even though we have food at home. If you monitored this, you would be able to reduce your spending and have more money for retirement.
If you find that spending money using your debit or credit card feels like you aren’t spending money at all, go back to using cash, and this should hopefully prevent you from making unnecessary purchases.
Another tip is to wait a few days before purchasing something you want, as sometimes the initial impulsivity is not a reflection of how much you want the product.
Overall, the best tip we can give you to avoid debt and increase your funds is to not spend more than you earn. It may sound obvious, but plenty of people do not keep track of their finances, and the reason they have no savings is that they are spending more money than they have.
To avoid this, keep credit card use to a minimum, monitor what you are spending every week, and spend time-saving up for big purchases.
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5. Borrowing money
Before doing something permanent like downsizing, why not consider asking one of your loved ones to help you out financially? This is much easier said than done, as you may not find someone willing to lend you money, or someone who could afford to do this.
Yet, if you ask the people you trust the most, you may find that there is someone who would be able to lend you money temporarily, and this could help you out massively with your retirement.
Just as we mentioned with short-term loans, this is not a permanent fix, so you would need to make sure you could pay back the money within an agreed timeframe. Be careful with this, as borrowing money has been known to cause relationship breakdowns.
The advantage of doing this is that it is very quick and easy. You do not have to spend weeks filling out forms and meeting eligibility criteria, which means you can access money much quicker. This is ideal if you are in a desperate situation.
If someone has borrowed money from you in the past and they are now in a better situation, you could ask them for help, as you have already established that they are reliable in terms of paying you back, so you could trust them to lend, and they would be more likely to trust you as a borrower.
6. Equity release
Our final suggestion for an alternative to downsizing in retirement is equity release. This allows you to get money from the value of your home, which is likely to have increased since you bought it.
It is a long-term scheme, so it does require commitment, but you will benefit from it for the rest of your life.
The money you are offered is tax-free and does not have to be paid back while you are on the scheme, as it is repaid when the equity release lender sells your property after your death (or your move to permanent care).
If you decide to release equity, you can put all of the funds towards improving your retirement. You could use the money to top up your weekly income, to purchase an essential for retirement (e.g. a car), or to have home improvements.
One advantage of using equity release to fund retirement is that it is easier to qualify for equity release than it is for some traditional loans. This is because you can take out equity if you have a low income, or a poor credit score.
The only things that matter are your age (55 or above), your property value (£70,000 or above), and your home ownership (you must own a property to qualify).
Another pro of equity release is that it is affordable. You do have to pay certain fees to release equity, but it tends to be less expensive than downsizing or remortgaging.
What’s more, if you cannot afford these fees, most lenders will permit you to use your loan to cover the equity release costs.
However, one reason to avoid this alternative is that it is based on compound interest, which means that the interest accumulates over time and can put homeowners in a lot of debt.
That being said, they do not have to repay this debt, so it is debatable whether this is a significant disadvantage.
Another downside of equity release is that younger homeowners may not benefit as much as older homeowners, as they may not be eligible for the lowest interest rates and the highest loan amounts.
This means that people around the age of 55 may find that downsizing would be more profitable for them.
Please call our 24-Hour Helpline: 0330 058 1579
Can I Downsize Before Releasing Equity?
Yes, you can downsize before releasing equity. If you want to take part in equity release but you do not want to live in your current home for the rest of your life, you could move into a smaller home first.
This would allow you to live in your preferred property for your entire retirement.
Furthermore, you would most likely have more money for retirement, as your mortgage repayments would be lower in the smaller home, and the bills would be less expensive.
That being said, remember that property value is a significant factor in calculating an equity release loan, so if you move into a lower-value property, your loan will not be as large as it could be in your current property.
The property would have to be worth at least £70,000 and be in a good enough condition for an equity release provider to be willing to offer you a loan.
Moreover, not only would you be paying fees to release equity, but you would also be paying downsizing fees, so it could get expensive.
If you are eligible to release a large amount of money, this would most likely be worth it, but it is still something to consider.
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Can I Downsize After Releasing Equity?
Yes, you can technically downsize after releasing equity. However, it may come at a cost. If you downsize as an equity release customer, you may have to pay an early repayment fee.
This fee is different with each lender, and it tends to decrease the longer you have been an equity release customer.
Some equity release lenders offer downsizing protection, which allows you to move to a smaller home without paying the early repayment fee.
It is definitely worthwhile to look for a lender with this guarantee, as you never know how your circumstances might change in the future, and it is always better to have the option to move house if you need to.
We would never recommend that you pursue equity release as a way to downsize. Equity release is a scheme that is designed to last for the rest of your life, so you would not benefit from treating it as a short-term scheme.
You would end up owing a large amount of interest for no reason; if you are after a short-term fix for your finances, do not choose equity release.
Please call our 24-Hour Helpline: 0330 058 1579
Get in Touch With Equity Release Warehouse
If you are interested in downsizing to release equity, downsizing after releasing equity, or releasing equity in general, we are here to help.
Contact us any time between 8am-8pm on 0330 058 1579. We would also advise you to read our article on equity release vs downsizing, as it provides more detail about the two schemes and how they compare.
We are passionate about exploring the pros and cons of equity release, as we know that this scheme is not for everyone, so we want you to be completely aware of anything that could go wrong before you make a final decision. Equally, we want you to appreciate how much equity release could change your life before you dismiss it.
Having said that, we accept that downsizing alone can be a great way to improve your financial situation in retirement, so we do not discourage you from this if you believe it is the best option for you personally.
Please call our 24-Hour Helpline: 0330 058 1579
References
[1] Should I downsize to a smaller home? https://www.halifax.co.uk/mortgages/help-and-advice/moving-home/downsizing-to-a-smaller-home.html
[2] How Does Remortgaging Work? https://www.barclays.co.uk/mortgages/remortgage/remortgage-process/
