Why downsizing isn't just for pensioners

Cashing in on the value of your home by moving to a smaller property is not only an option for those in retirement!

Downsizing isn't something people only do at retirement. If you're a homeowner, you may be in a position to downsize to a smaller, cheaper property at any age, and generate a fat sum of much-needed cash.

Downsizing involves selling your existing property, using the spare equity to buy somewhere smaller and cheaper, and banking any profit on the transaction.

By doing so, you can generate tens of thousands of pounds in tax-free cash (assuming it's your sole property).

You can also cut your household running costs, such as mortgage repayments, heating bills and Council Tax. This could easily save you hundreds of pounds a month.

People have traditionally downsized at retirement, and used the money to supplement their pension.

But growing numbers of younger people are doing it as well.

Down, down

Downsizing is now the main reason people sell their homes. Almost half of homeowners who plan to sell in the next three years are looking to downsize, according to research from Lloyds Bank.

And they're not all retiring to country cottages or granny flats. The average downsizer is 40 years old, while one in four are aged between 26 and 35, Lloyds says.

As the cost of living outpaces wage rises, some 43% of downsizers are looking to cut their household bills, against 37% who see it as a way to fund their retirement.

You're never too young to downsize.

Size isn't everything

Rising house prices have added to the attractions. The average house is worth £176,491, according to the latest figures from Nationwide, up £14,000 in a year.

Land Registry figures showed prices in London rising 11% to an average £403,792.

The average homeowner raises £97,722 by downsizing, soaring to an average of £272,000 in London, Lloyds says.

Who wouldn't want to get their hands on that kind of cash?

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It'll cost you £10,000

Naturally, downsizing isn't for everybody. If you love your house, cherish your neighbours, live close to your job, shops, family or a good school, you may rule it out.

Then there is all the upheaval of moving, not to mention the cost.

Say you plan to move from the average detached property, currently worth £263,040 according to Land Registry figures, to the average semi-detached property, which costs £158,771.

That should give you a profit of £104,269, but you have to factor in the costs.

First, you would likely have to pay an estate agent to sell your property. With the average agent charging 1.75% plus VAT, this would cost you £5,523. You would also have to pay around £375 in conveyancing fees, and a similar amount to buy a new home. 

Add £500 for a survey on your new home, 1% Stamp Duty at £1,588, removals at £1,250 and your costs would total £9,236 on your new home, reducing your profit to £95,033.

That still isn't bad. When did you last earn £95,000 tax-free for a few months' effort?

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Thousands of reasons to downsize

If you move to a smaller home, your gas and electricity bills should also be smaller. With the average dual-fuel bill currently £1,315 a year, according to Ofgem, that can be reason enough to move on its own.

If you have a mortgage, you could slash your repayments. Say you were paying 3.99% a year on £95,000-worth of mortgage you no longer have. By downsizing, you will have saved yourself £3,791 a year on interest repayments alone.

That's £316 a month.

You should also cut your Council Tax bill. Your household insurance costs might dip slightly.

Ups and downs

You have to consider all the angles. If downsizing means you face a long commute, the extra petrol or train fares could eat up most of your savings.

You will also sacrifice any future gains in the value of the property you have sold.

If your home is worth £263,040, and house prices rise 10%, you will gain £26,304. But if you downsize to a property costing just £158,771, that 10% gain is worth just £15,877.

This means that younger homeowners who downsize could sacrifice years of capital growth, which could have funded their retirement income at a later date.

Downsizing works best if you own a pricey property in, say, London and the south east, and plan to relocate somewhere far cheaper. But be warned: if you move out of London or other property hotspots, you may never be able to afford to move back.

If you already live in an area where house prices are cheap, you obviously won't raise as much cash. Many people will also be reluctant to downsize if it means moving downmarket.

Have you downsized? Or are you planning to? Tell us about your experiences in the Comments box below.

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