I WROTE about downsizing in last week’s column as a way in which you could release capital from your home instead of ‘equity release’, so I thought I would go into more detail to explain what downsizing means while pinpointing other things you need to be thinking about.
Downsizing isn’t just about moving to a smaller home. It’s a strategy to unlock equity, reduce costs, and sometimes pave the way for a simpler, more flexible lifestyle.
But, as with any financial move, it comes with opportunities and risks.
So, let’s look at why people downsize, the financial dynamics involved and the practical steps you need to take to ensure you make the right decision for you.
The motivation to downsize can be from tax concerns and a desire to pass on wealth to children especially after the Autumn Budget and the impact on pensions.
Downsizing can also be a way for people to reduce their expenses. Smaller homes often mean lower maintenance, energy and council tax costs.
With UK house prices still robust in many areas, trading a large home for a smaller one can free up significant capital for investment, retirement, or helping the next generation.
For some, maintaining a large property can also become impractical, or isolating, as families grow and move away from the family home.
As you’d expect, downsizing potential varies dramatically by location and size. The numbers are no surprise.
Statistica’s numbers show significant capital release in different geographical locations.
Moving from a detached to a semi-detached in London may release around £300,000 compared to £100,000 in Wales.
Moving from a detached house in Belfast or the Glens, to central or more western regions, can also release significant gains.
There are many regional variations and market conditions but a leisurely drift around Rightmove will soon point you in the right direction.
And while the allure of releasing equity is tempting, the path to downsizing isn’t without its hurdles as there are key costs to consider.
Although stamp duty is set to rise in March, it currently takes a bite out of your profits. For example, on a £300,000 home, it could cost £2,500 under current rates. But, from April 2025, it could cost £5,000.
And there are of course other things to take into consideration.
In terms of renovations, preparing a property for sale, and the cost of doing work to make your new home suitable for your needs, can quickly add up. We can often be blinded emotionally.
We choose to see the new balcony on the new house instead of seeing the damp which has been painted over or the goat in the garden next door.
Take your time to be unemotional.
Think about moving costs also. Removal companies, legal fees and estate agent commissions all need to be factored into the budget for a few reasons - to avoid eroding your gains and to avoid selling a house full of memories for no reason. A home can often become a house which you have ‘done up’ just to sell.
Furthermore, downsizing can also be chosen as a means of boosting your retirement income to supplement pensions, offering more financial stability, or enabling bucket list dreams like travelling.
Gifts to families are common so you can at least see their faces as they benefit.
People who choose to downsize often use their newfound capital to help their children with education, house deposits, or other financial milestones or they use the funds to improve their own lifestyle with a smaller more efficient home spending less time on upkeep and more on the things you love.
Look for homes which can accommodate your future needs. Features like stair-free access, adaptable bathrooms, or proximity to public transport can save money and stress down the line.
Downsizing isn’t without its challenges and pain points. The UK faces a chronic shortage of smaller homes designed for older adults. New builds often cater to families or first-time buyers, leaving fewer options for downsizers.
Selling at the wrong time can significantly impact how much equity you unlock. A sluggish market might mean compromising on price. Moving from a family home filled with decades of memories is no easy feat, and, for some, it can outweigh financial benefits.
So, consider alternatives. If the emotional or logistical barriers feel too high, explore other ways to reduce costs, like renting out part of your home or of course a full 180 degree turn around to consider equity release.
For those rattling around in homes which no longer fit their needs, downsizing can be a powerful way to step into the next chapter.
But it’s not just a financial decision; it’s about lifestyle, legacy and finding joy in a home that suits you now.
- Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary guide on equity release, call 028 6863 2692 or email info@wwfp.net
