Downsizing: What to Consider?

An explanation of what downsizing means is followed by an investigation of the pros and cons. Options for taking equity out of a home without selling are then assessed, along with an examination of downsizing in retirement and the market forecast for downsizing.

What is downsizing?

Downsizing is usually considered when children grow up and move away, leaving homeowners feeling that their house is too bigas they experience `empty nest syndrome.’ Downsizing, or moving to a smaller, perhaps more easily manageable property, may seem attractive.

Many homeowners regard their house as form of pension and see downsizing as an inevitable part of their financial plan. Downsizing also happens for personal and social reasons, for financial considerations including tax, or simply due to a desire to move to a more convenient location.

A Lloyds Bank survey found the main reason (53%) to downsize was a change in circumstances, such as family members moving out, followed by finance and lifestyle.

The attractions of downsizing:

  • Quality of life: for those living in a house that is too big and costly to run, downsizing may represent the opportunity to free up cash for leisure or retirement.
  • A less time-consuming house may be appealing, offering less maintenance, reduced bills and an easier to manage garden.
  • Release equity to invest: with the current low interest rates, a financial adviser could propose other investment options such as the stock market, corporate bonds or equity income funds to create an income.
  • Move to an accessible town or village with facilities close at hand.
  • Selling the family home and buying a `lock up and leave house’ could create a flexible lifestyle option if travel is attractive in retirement.
  • Buy a property with ancillary accommodation for a carer or guests.
  • Move to a town or city for the increased cultural opportunities and easy proximity to shops and hospitals.
  • Buy a retirement flat: purpose-built complexes offer company and community in older age.
  • Pay off debt.
  • Unlock equity and help deal with potential inheritance tax (IHT) liability and estate planning. Cash from a house sale can be gifted to children or grandchildren during a lifetime; such gifts are counted as Potentially Exempt Transfers and do not count as part of an estate provided the giver lives for a further seven years after making the gift. Other IHT exempt annual gift allowances may be available.
  • Other options from freeing up equity: a survey of over 2,000 people aged over 60 carried out by Churchill Retirement Living found that 28% would top up their pension; 41% would give a proportion to family members as inheritance; 29% would spend it on a family holiday and 7% would spend money on social life.

Reasons not to downsize:

  • Some homeowners simply like their home too much to move.
  • If financial considerations are not relevant.
  • If it is not financially viable to move.
  • Moving would remove the ability to host family gatherings.
  • Funds can be generated from a house without selling it.
  • The high costs of moving:includingStamp Duty, conveyancing fees, estate agents’ fees and the cost of removals.

Options for taking equity from a property or creating an income from it:


For homeowners who have equity but are cash poor, one alternative to moving house is an interest-only mortgage. However, there is usually a maximum age limit of around 65-70 and it must be paid off by a specified age. Retirement Interest Only mortgages are available for retirees and have no upper age limits.

Equity release or taking out a lifetime mortgage:

This is available to over 55s; most schemes involve a lifetime mortgage plan with the debt secured against the home and the interests rolls up until the holder dies or sells. This option can be useful if a lump sum is needed.

A lender advances a proportion of the equity tied up in a house, provided that the mortgage is paid off. The balance is repaid with interest on death or when the holder goes into care. Costs are attached to the arrangement and obviously it results in there being less of an inheritance to leave.

Rent a room out to a lodger:

The Rent a Room scheme allows tax free earnings of £7,500pa.

Rent out the large family home:

This offers the option of living off the rent to create an income, and then renting a smaller house. While getting off the property ladder in this way may not suit everyone, renting helps avoid Stamp Duty costs.

Downsizing in retirement

According to Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, downsizing in retirement can make real sense financially.

“You may have paid off your mortgage on your family home and are looking to make the move to a smaller place better suited to your needs, i.e., a bungalow as opposed to a four bed, two storey house,” she said.

“You could potentially free up a decent amount of money to supplement your retirement income while also benefiting from lower bills and less maintenance costs.”

“However, it is something that needs to be considered carefully. The costs of selling one home and buying another are high and could take a hefty chunk out of any profits you make. For instance, if you were to purchase a £400,000 home you would pay £10,000 in stamp duty alone. Add in estate agent fees, conveyancing and removal costs, then you could be looking at costs north of £20,000 so you need to take account of this.”

“You may also find moving becomes a very emotionally-charged decision. In recent Hargreaves Lansdown research, 28% of those who ruled out downsizing said it was because they were attached to their home – they have made memories there and may not want to leave an area where they have built up a network of friends and family. Some will choose to release money from their home via equity release. This means they don’t have to sell up and move elsewhere but the costs can be high as interest rolls up over time, so it needs to be considered carefully.”

Helen added:

“If you do manage to release a decent amount of money through downsizing, then it is important not to just leave it in a cash account long term. We know the interest rates being offered by most banks fall way below inflation and if you leave your money there long term, it will start to lose purchasing power. We recommend retirees have between one- and three-years outgoings in a cash account. For money you’re planning to hold for longer, stock market-based investments may well make sense, because while the value of your investments will fluctuate in the short term, over the long term, stock markets have more potential for growth than cash. “

“You could for instance pay money into your pension. If you’re under 75, you can still get tax relief, even if you’ve stopped working. If you’re a non-earner or earning less than £3,600, you can pay in up to £2,880 each tax year and the government will automatically add up to £720 (20% tax relief) on top. If you have already taken some money out of your pension (bar the tax-free lump sum) then watch out for the money purchase annual allowance. This means you’re restricted to paying in up to £4,000 a year in total, including tax relief. “

More incentives are needed to encourage older homeowners to downsize when they do not have to, according to Tim Kampel, director of Box Property Solutions Ltd:

“The older generation is keeping its money in property; they do not want to sell up and lose this money,” he said. “A tax duty break could lead to them moving to a more appropriately sized house.”

The Outlook for Downsizing

Covid-19 appears to have made more over 55s want to stay in their homes rather than downsize; the pandemic has put a new focus on the importance of space and lifestyle, friends, family and living within a good community.

Research by Legal & General Financial Advice found that the number of over 55s looking to downsize fell by 200,000 in the last three years. As we see the end of the pandemic, this may change, and there are still 2.9m older households considering selling.

The willingness of older people to downsize is important as it frees up larger houses for young families; if few larger houses are available, prices are driven upwards. There are calls for more government incentives to encourage downsizing to bring more family homes to the market, helping ease the shortage.

Downsizing also needs to be attractive for tax reasons. Another spin-off from Covid-19 is the desire for more space to work from home, meaning that younger buyers can liver further from city centres and want larger houses, adding to the competition.

What do you think?

If you would like to share an interesting or informative experience of downsizing, we would love to hear about it: please get in touch!

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