Downsizing is the act of getting a house that’s smaller than the one you’re currently living in. It’s prevalent among homeowners over the age of 55. There are many reasons why older homeowners want to sell their homes. They may want to move to a smaller house, a retirement residence, or a condo. In fact, many older homeowners wish to downsize their homes simply because it is a less expensive accommodation.
Many homeowners engaged in downsizing, at least until the COVID-19 pandemic happened. The number of downsizing homeowners dropped because they couldn’t afford a new place or have family close by. The lockdown changed the way we spend our time in our homes, which has influenced some downsizing decisions. A fair amount of people have said they have enjoyed having more space during the lockdown, while others simply decided to invest in their current homes rather than move on.
In this article, we’ll take a look at how the pandemic has changed people's perceptions about downsizing. Read on below to learn more.
The State of the Housing Market
It’s no secret that the housing market is problematic. Prices are unpredictable, and you may find yourself in a bad situation the moment you make a wrong move. In general, downsizing is a welcome concept because downsizing homeowners can free up to 2.9 million homes. Conversely, the demand for properties tailored to families is always high.
In general, the reason why homeowners downsize is that a new property is more suitable for retirement. Think about it this way: a bungalow would be better than a two-storey house if the stairs became an issue later in life. However, the pandemic made other factors rise within the housing market, such as the combination of curbs on pension transfer values, tighter lending rules for those with equity in their home. Additionally, tax changes and the general squeeze on incomes mean many downsizers are now choosing to stay put, with the average home’s value up by £6,000 in just 12 months.
For homeowners who have very much made up their mind not to sell, the main reasons for saying no are the current property prices are so high they cannot find anything suitable for their needs. They are also unwilling to downsize because they are still working or have hobbies to keep them busy.
The Risk of Downsizing
While it’s a seemingly logical choice, there are also some risks in downsizing. Moving out is stressful at the best of times, and this stress can intensify due to various factors, such as the time it takes to sell the house and delays that can occur while purchasing a new home. There’s also the matter of costs involved because property experts tend to charge high fees, including the estate agents' commission, typically around 2%, while purchasing the home's value. In addition, there are also the costs of a conveyancer and a surveyor, not to mention stamp duty when buying a new home.
It’s sensible to downsize as part of a more comprehensive retirement strategy, but it pays to plan carefully.
When You Downsize Too Soon
In some parts of the country, particularly in the southeast of England, the housing market is stagnating, with few properties changing hands and prices not rising as fast as they have been over the past few years. Homeowners are also feeling the pinch of the slowdown, with many of them admitting they have been forced to delay their plans to move to a more suitable home. While this is a somewhat inevitable by-product of a cooling market, it does mean that some people who have downsized have been unable to move on due to a lack of suitable properties on the market.
What You Can Do in the Future
Homeowners over the age of 55 usually have two options: tax inheritance and releasing equity.
More about Tax Inheritance
As the name suggests, tax inheritance is the tax on the estate of someone who has died. In the UK, there’s no need to pay for it if:
The value of the estate is below the £325,000 threshold
Everything above the £325,000 threshold is left to a spouse, civil partner, or a charitable institution.
If the estate’s value is below the threshold, it must be reported to Her Majesty's Revenue and Customs (HMRC). The threshold can increase up to £500,000 if you give your estate to your children—biological, adopted, foster, stepchildren, and even grandchildren. On the other hand, any unused threshold can be added to your partner’s threshold when you die if you’re married or in a civil partnership and your estate is less than your threshold. As a result, your partner’s threshold can go up to £1 million.
An equity release is a financial arrangement where a homeowner sells all or part of their home to a financial organisation. In exchange, the organisation pays money to the person but gives them the right to continue living in the property.
There are two options that homeowners can have on equity releases. These are:
Lifetime mortgage - You take out a mortgage on your property as long as it's your primary living residence. At the same time, you will retain ownership of the property. You can reduce taxes on your property by setting up a trust with your heirs so that when you die, they inherit the property and the tax burden passes to them. You have the choice of making payments or letting the interest roll up. In the end, the loan amount and any built-up interest are paid back when the last borrower dies or if they go into long-term care.
Home reversion - You sell all or part of your home to a reversion provider in return for a lump sum or regular payments. You get to have the right to continue living in the property until you die, though you need to agree to maintain and insure it. When the person last making payments on a loan passes or moves into long-term care, the property is sold, and the sale proceeds are split evenly among the remaining owners.
In the past, it was common for companies to offer a conveyancing service to generate new business. In other words, the conveyancing was an add-on to a mortgage. This meant that the company had a commercial incentive to rush the process. If a mortgage was involved, then a quick completion was a matter of urgency because the lender wanted the money back as quickly as possible.
Don’t Forget the Essentials
If you decide on downsizing, there are some things to remember. Legal and financial aspects may be required depending on the type of transactions, and the standard documents may not cover them.
Budget is also important, although that’s pretty much covered if you’re selling your home. But what are your needs? Are you looking to move closer to friends and family, or are you simply looking for the cheapest place possible to live? Is there any specific location that you are drawn to? Are you a city lover or a country lover? The answers to these questions will allow you to narrow down the list of potential properties to look at. Once you have a clearer idea of what you are looking for, you can push through with your plans.
While downsizing isn’t currently a widespread practice, it always pays to consider it for your future. You might be thankful for the choice because you’ll still be able to have a good quality of life in your senior years.
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