Does downsizing make sense?

[Glasgowgirl81]

We currently live in a new build 4 bed home. We moved into it about 10 years ago with our then 2 year old daughter thinking we were going to have more children which we never had. I’m worrying constantly about the rise of living costs and wondered if it made sense for us to downsize as a smaller home is cheaper to run. We are in the very fortunate position of being mortgage free due to Inheritance but we are by not means wealthy and are approaching 50 with hardly anything in pensions. Curious as to what everyone’s thoughts would be? Many thanks in advance.

Difficult to answer! You have a 12/13 year old. Will you need extra space as she continues to grow and want friends over for sleep overs etc. - do you want to be on top of big, gangly, messy teenagers ?! Will your jobs change and you may need to work from home? Could you rent out a room / garage /driveway for extra income as you get to retirement? Also, you don’t have to downsize immediately - you have time to look around and see if there is a property you would regret missing, if you didn’t buy it.
sorry I haven’t given a yes/no answer, but maybe somethings to help you decide?

Hi Op, we are in exactly the same position as you, albeit with an 8 year old. We have a very large home (5 bed) on a large plot. And have decided that in a couple of years time, we’ll also do a major downsize. Our thinking is that DD shant be so bothered about having a large garden in her teenage years. Plus we have a lot of equity in this property (it was the kind of home that boomed in value due to Covid) and would like to invest in other things - including our pension.

We also now know that although having a large house is lovely, we could get by with something a lot smaller. And as you say would be more economical to run.

Let say your house is worth £500K and you downsize to a smaller place worth £300K. You'll pay 1.5% EA fees to sell (£7.5K) and stamp duty of £5K in England.
Let's call it £1K estate agent, £1K survey and £1K moving costs.

Your new position is now £300K with £185K liquid in the bank.
If you each put a pension contribution of £40K (annual allowance, beyond that there is tax implications).
£20K each into an Isa (stocks and shares).

Basically, no.
The transaction costs will be £15K and the growth on the liquid cash is limited.

As you're mortgage free do use your annual allowance pension contributions and after 55 consider again.

We don't know what the housing market will do nor pension funds, however having the the £500K asset you can liberate when you're approaching drawing down from your pension would make most sense IMHO.

Excuse the back of a fag packet calculator

Let’s

@RichmondMumof2 thats v useful….we are considering a similar move but are already 55 - what would you say then? Stick it out to 65 - downsize once and what do you do with the equity released in order to have an income stream (no pension) - do you but an annuity or put it into other investments (how do you choose?)

Do you have a garage that you could convert into a flat to let your or us there any other way you could create an extra income from your house? Could you get solar panels so your energy bills reduce?

Thanks all for your suggestions and thoughts. Our house would probably get £300k max. I’m not expecting to get a huge profit from selling its more the running costs of the larger house.

You say you live in a new build which I'm assuming means it is well insulated, good heating system, energy efficient, etc. All which reduce the cost of running a house. You would need to buy a smaller new build to achieve the same energy efficiency.

If you downsize, it will cost you initially due to costs identifying above. However, you can then maximise your savings into your workplace pension or a SIPP (or both).

There are maximum amounts you can put in depending on how much you earn so you need to check the numbers but basically you’ll get a 20% contribution from HMRC in a SIPP up to a maximum of 32000 pa (+20% = £40000). That should more than offset your selling costs and get you on the pension ladder. The longer you invest for, the better.
if you wait until you retire before downsizIng, you won’t get that 20% bump. But DYOR.
if it was me, I’d definitely give it serious consideration
good luck whatever you decide

We downsized a few years ago. All dc already left home. We were able to buy our new home and a rental property from the equity. Coupled with our pensions/savings it's allowed us to originally go part time and then retire early,
this year. We are a lot better off and It's cheaper council tax but the bills are pretty similar tbh. Roughly save £10 a month on gas/electric. It is a lot less maintenance though and there's obviously not as much cleaning or decorating.

Depends on the house. I am in a small terrace house and it is a fortune to heat Nearly £700 this month and for that we have 2 electric heaters, lighting (with energy saving bulbs), dishwasher and washing machine that are set off during the night because it is cheaper and hob and oven for cooking and freeze to the point of ice on the inside of the windows., Smaller house doesn’t mean smaller energy bills.

As a comparison my 5 bed house with gas central heating set to tropical heat, tumble dryer going after every wash and lighting akin to Blackpool Illuminations was nearer £300 per month maybe would be £450 with the price increases in the winter months. But for that I was at least warm. I don’t mind paying the £680 if I could say I had heat. But £680 and to be freezing to the point where I haven’t had a shower for weeks because I am so cold I can’t take my clothes off is ridiculous. (Fortunately I work alone.😀)

I suspect downsizing makes the most financial sense if you’re doing a location move at the same time eg a London to Devon move (which I’d assume you wouldn’t be doing at the moment). A 4 bed newbuild could actually cost less than an older 3 bed with rubbish insulation. The moving fees etc would probably wipe out a lot of your gain at the £300k point.

''@RichmondMumof2 ·
Let say your house is worth £500K and you downsize to a smaller place worth £300K. You'll pay 1.5% EA fees to sell (£7.5K) and stamp duty of £5K in England.
Let's call it £1K estate agent, £1K survey and £1K moving costs.

Your new position is now £300K with £185K liquid in the bank.
If you each put a pension contribution of £40K (annual allowance, beyond that there is tax implications).
£20K each into an Isa (stocks and shares).

Basically, no.
The transaction costs will be £15K and the growth on the liquid cash is limited.

As you're mortgage free do use your annual allowance pension contributions and after 55 consider again.

We don't know what the housing market will do nor pension funds, however having the the £500K asset you can liberate when you're approaching drawing down from your pension would make most sense IMHO.

Excuse the back of a fag packet calculator''

Missing the point I would say.

A smaller property/garden would mean cheaper utility bills and council tax plus less maintenance costs.

No point in having a ''500K asset'' if you are struggling to meet the cost of living increase and pay your electricity/heating bills...