Op, who exactly has told you that you can't convert the garage? If it just a room conversion (eg no kitchen, plumbing etc) then it should only need to satisfy building regs, and not need planning permission. We have just converted our garage into a dining room. We live on a new build estate, so needed a letter of permission from the developer (which was easy to get, cost us £120), then the builder dealt with the building regs (waiting for certificate to come through, it was only finished Christmas week!).
My last house was a townhouse with large kitchen on ground floor and living room on 1st floor (it did also have a separate dining room on the ground floor, but I used it as a kind of office room and had a sofa in there too, so it could have been used as living room if I'd wanted I guess).
The main bedroom with en-suite was also on the first floor, then the other 3 bedrooms (bedroom 4 was a tiny box room) on the top room. The only thing I didn't like about it was that I am a very light sleeper, and I could hear every movement from the rooms above me. Literally could hear my daughter turning over in bed sometimes, and could definitely hear her talking (as she could me). Not saying all townhouses are like that, but something to consider, especially if you have creaky floorboards above!!
We also stayed at a friends house early last year (before the pandemic) who have a townhouse. Their bedroom was on the top floor, we stayed on the middle floor. I could hear her husband snoring all night!
My kids were 9 and 10 when I moved into it so didn't need me as much, but if you've got 1 year old twins how many times are you likely to need to run up and down stairs when they're in bed and you're down in the kitchen for example? Will certainly keep you fit, but it's just another consideration.
Please don't take this as negative, in spite of what I've written above I loved my townhouse. When I came to sell I had a local agent telling me they were a nightmare to sell as people didn't want them. Clearly I didn't go with him, and my house sold in a week, so people obviously do like them.