The kids have flown the nest, and you no longer need a large high maintenance property – maybe it’s time to downscale? For some, this could be a tough choice to make, especially if they have lived in the home for many years and seen their kids grow up there. However, others may well look forward to a more relaxed lifestyle, unfettered by monthly mortgage payments and the never-ending upkeep and maintenance that is part and parcel of owning a larger property.
Either way, when it comes to downsizing, there are a few aspects to consider.
There are numerous lifestyle benefits to downsizing from a large property to a smaller one. For one, you are no longer responsible for the upkeep and maintenance of a home, a large garden, and other property features you may no longer use. Also, downsizing can result in significant monthly cost savings on water, gas and electricity, council tax, buildings and contents insurance, ground rent, service charges, and maintenance and building work.
Run the numbers
The biggest expense in most households is the mortgage repayment, and whether you will be free from this responsibility will depend on how well the family’s finances have been managed. If you have paid off your mortgage or at least the bulk thereof, it might be possible to sell the property, settle the outstanding balance and have enough capital to purchase a smaller property without having to enter into a new loan agreement.
On the other hand, if enough equity has not been built up, things could be slightly more tricky, especially if you are retiring. After a certain age, banks are not as willing to grant applicants mortgage finance. In this situation, you will need to carefully consider what monthly rental or mortgage repayment you can afford on your lower pension income. Bearing in mind, it will also need to cover the costs involved in buying a new property, such as a deposit, stamp duty, conveyancing, valuation fees, mortgage arrangement and broker fees, and removals.
Capital Gains Tax (CGT)
Most people who sell the primary residence will not have to worry about paying Capital Gains Tax because of the private residence relief. However, there are certain instances where CGT becomes a factor in the property sale. You may be required to pay CGT if:
- Part of the home has been developed, for example, by converting part of it into flats
- You sell part of your garden and your total plot, including the area you’re selling, is more than half a hectare (1.2 acres)
- A portion of the home has been exclusively used for business
- Let out all or part of your home – this doesn’t include having a single lodger (to count as a lodger and not a tenant you need to be living in the property too)
- You have moved out of your property 18 months or more ago – to move into a partner’s home for example
- The home was purchased for the purpose of renovating it and selling it on.
Timing is key
If it is not the best time to sell, consider delaying the decision to downscale by a few months as it could result in a better selling price depending on market conditions. On the other hand, you would be selling and buying in the same market and delaying the downsizing decision could mean missing out on a good buying opportunity.
What about letting it out?
If your mortgage is paid off, perhaps consider letting out the property, rather than selling. If there is still a mortgage on the property, this option will be far less attractive with the introduction of the Section 24 taxation on landlords. Letting out the property will also come with its own set of challenges such as who will manage the property. This option will also require you to have enough cash flow to cover any vacancies. While letting out the property can supplement your income, it is important to remember that once you have let the property for 18 months it becomes subject to CGT.
Provided all aspects are considered carefully, downsizing can form part of a comprehensive plan that leads to a simpler lifestyle that offers financial freedom. A real estate professional or financial adviser will be able to give excellent advice on the first steps.0