Remortgage vs Downsizing

Understanding the Downsizing Option

Downsizing means selling your current property and buying a smaller or less expensive one. The difference between your sale proceeds and the cost of the new property, after deducting all transaction costs, is the equity you release. This released equity can be used for retirement funding, debt clearance, gifting to family members, or simply reducing your ongoing housing costs.

For many homeowners, downsizing becomes an attractive option when their circumstances change. Children leaving home, retirement approaching, or the physical demands of maintaining a larger property can all prompt consideration of a move to something more manageable.

The financial benefits of downsizing can be substantial. If you sell a 450,000-pound home and buy a 300,000-pound property, you release approximately 150,000 pounds in equity minus transaction costs. If you buy the smaller property outright without a mortgage, you also eliminate monthly mortgage payments entirely.

However, downsizing involves significant upfront costs. Estate agent fees on the sale, conveyancing costs for both the sale and purchase, stamp duty on the new property, removal costs, and any work needed on the new home can easily total 20,000 to 40,000 pounds or more. These costs reduce the amount of equity you actually release.

The emotional cost of downsizing should not be underestimated either. Leaving a family home where you have lived for many years, where your children grew up, and where you have established community connections can be deeply challenging. It is a decision that requires careful thought beyond just the financial numbers.

Downsizing also requires finding a suitable property to move to, which may not be straightforward. The type of property you want may be in short supply in your preferred area, and you need to manage the timing of selling and buying to avoid either a chain break or the expense of temporary accommodation.

Understanding the Remortgage Option

Remortgaging allows you to change the terms of your existing mortgage or borrow additional funds against your property without moving. This can achieve many of the financial goals that might otherwise prompt a downsizing decision, while allowing you to stay in your current home.

Reducing monthly costs: If your current mortgage rate is uncompetitive, remortgaging to a better deal can cut your monthly payments significantly. Extending the mortgage term can also reduce monthly costs, though this means paying more interest overall.

Releasing equity: A capital-raising remortgage lets you borrow additional funds against the equity in your property. This can provide a lump sum for various purposes without the need to sell. The amount you can release depends on your property value, existing mortgage balance, and the lender's maximum loan-to-value ratio.

Restructuring your mortgage: Remortgaging can allow you to switch from interest-only to repayment, consolidate debts, or adjust your term to better suit your current circumstances. These changes can improve your financial position without any change to your living arrangements.

The costs of remortgaging are typically much lower than downsizing. With many lenders offering free valuations and legal work for remortgage customers, the total cost might be zero or just a few hundred pounds for arrangement fees. Even where fees apply, they are a fraction of the costs involved in selling and buying.

The key limitation of remortgaging is that you can only release equity up to the lender's maximum LTV, and you must be able to afford the new mortgage payments. If you need to release a very large amount of equity or eliminate your mortgage entirely, downsizing may release more capital. Remortgaging also does not help if your reason for wanting to change is that the property itself is no longer suitable.

Detailed Cost Comparison

Understanding the full costs of each option is essential for making an informed decision. Here is a detailed comparison based on typical UK costs.

Costs of downsizing (selling a 400,000-pound home, buying at 280,000 pounds):

• Estate agent fees - 4,000 to 8,000 pounds (1% to 2% of sale price)
• Conveyancing (sale) - 800 to 1,500 pounds
• Conveyancing (purchase) - 1,000 to 2,000 pounds
• Stamp duty on purchase - Varies, but on a 280,000-pound property could be 4,000 to 6,000 pounds for a non-first-time buyer
• Removal costs - 800 to 2,500 pounds depending on distance and volume
• Home improvements to new property - Highly variable, potentially 2,000 to 10,000 pounds or more
• EPC and other selling costs - 200 to 500 pounds
• Mortgage early repayment charges - If applicable, 1% to 5% of outstanding balance
• Estimated total - 15,000 to 35,000 pounds or more

Costs of remortgaging (on a 400,000-pound property):

• Arrangement fee - 0 to 1,500 pounds (many deals are fee-free)
• Valuation fee - Usually free with the remortgage, otherwise 300 to 500 pounds
• Legal fees - Usually free with the remortgage, otherwise 500 to 1,000 pounds
• Early repayment charges on current deal - If applicable, 1% to 5% of outstanding balance
• Estimated total - 0 to 3,000 pounds in most cases

The cost difference is stark. Downsizing could cost 15,000 to 35,000 pounds or more in transaction expenses, while remortgaging could cost as little as nothing. This difference needs to be weighed against the potentially larger amount of equity that downsizing can release and the ongoing savings from reduced or eliminated mortgage payments.

Over the longer term, downsizing can provide greater financial benefits if it eliminates your mortgage entirely or significantly reduces your ongoing housing costs. The upfront transaction costs are a one-time expense, while the monthly savings continue for years. The break-even point, where downsizing savings exceed the transaction costs, depends on the size of the cost reduction and how long you remain in the new property.

Lifestyle and Practical Factors

The financial comparison only tells part of the story. Lifestyle and practical considerations often play an equally important role in this decision.

Arguments for staying and remortgaging:

• Emotional attachment - Your home may hold significant memories and sentimental value that cannot be replicated elsewhere
• Community roots - Established relationships with neighbours, involvement in local groups, and proximity to friends and family
• Garden and outdoor space - Downsizing often means a smaller garden or no garden at all, which can be a significant loss for those who value outdoor space
• Storage and space - A larger home provides space for hobbies, storage, hosting visitors, and maintaining a comfortable lifestyle
• No moving stress - Avoiding the physical and emotional stress of packing, moving and settling into a new home

Arguments for downsizing:

• Reduced maintenance - A smaller property requires less upkeep, fewer repairs, and lower maintenance costs
• Lower running costs - Smaller homes typically have lower energy bills, council tax, and insurance premiums
• Better accessibility - Moving to a single-storey property or one with fewer stairs can be important as mobility decreases with age
• Fresh start - A new home can provide motivation, excitement, and the opportunity to create a space that suits your current lifestyle perfectly
• Releasing capital for experiences - The equity released from downsizing can fund travel, hobbies, or other experiences that enhance your quality of life

For homeowners approaching or in retirement, the practical benefits of downsizing often become more compelling. A smaller, modern property with good energy efficiency, low maintenance requirements, and single-level living can significantly improve quality of life in later years. However, these benefits need to be weighed against the upheaval and emotional cost of leaving a long-term family home.

Special Considerations for Older Homeowners

The remortgage versus downsizing decision has particular significance for older homeowners, who may face additional considerations and constraints.

Mortgage availability: Older borrowers may find it more difficult to remortgage, as many lenders have maximum age limits at the end of the mortgage term. If you are 60 and most lenders require the mortgage to be repaid by age 70 or 75, your available term is limited, which increases monthly payments. However, an increasing number of lenders are offering mortgages into retirement, and specialist retirement interest-only (RIO) mortgages are now available for borrowers with adequate retirement income.

Retirement income: Affordability assessments for remortgaging are based on your income, which typically reduces in retirement. Pension income, rental income and investment income can all be used, but the total may not support the same level of borrowing as employment income. This may limit the amount you can remortgage for.

Equity release alternatives: If a standard remortgage is not feasible, equity release products such as lifetime mortgages allow you to borrow against your home without monthly payments. The loan and accumulated interest are repaid when you sell the property, move into care, or pass away. These products should be considered carefully with specialist advice, as they reduce the estate you leave behind.

Inheritance considerations: If leaving an inheritance is important to you, downsizing and retaining the proceeds may be preferable to remortgaging or equity release, which both reduce the net value of your estate. However, if the priority is enjoying your retirement, the additional capital from a remortgage or equity release can fund a better quality of life.

Care needs: If there is a possibility that you may need care in the future, the equity in your property could be used to fund care costs. Downsizing and investing the released equity gives you liquid capital, while keeping the equity in the property means it is accessible through future property sale or equity release if care is needed.

For older homeowners, the decision often comes down to balancing current quality of life against future needs and inheritance wishes. Professional financial advice is strongly recommended, as the interaction between property equity, pensions, care funding and inheritance planning can be complex.

Making Your Decision: A Practical Framework

To help you decide between remortgaging and downsizing, work through the following framework that addresses the key questions.

Step 1: Clarify your goals. Are you primarily trying to reduce monthly costs, release a lump sum, find a more suitable home, or prepare for retirement? If the goal is purely financial, a remortgage may suffice. If the property is no longer suitable for your needs, downsizing addresses both financial and practical concerns.

Step 2: Calculate the numbers. Get a remortgage quote to see what deals are available, how much equity you could release, and what the new payments would be. Get estate agent valuations for your current property and research the cost of properties you might downsize to. Compare the total costs and net financial outcomes of each option.

Step 3: Consider the non-financial factors. Think about your attachment to your current home, the impact on family, your social connections, and your health and mobility needs. Sometimes the financial case points one way but the personal factors point another.

Step 4: Seek professional advice. Speak to an FCA-regulated mortgage adviser about your remortgage options and a financial planner about your broader financial situation. If you are considering equity release, consult a specialist equity release adviser. The cost of professional advice is small compared to the financial significance of this decision.

Step 5: Take your time. Unless there is an urgent financial need, do not rush this decision. Visit properties in areas you might downsize to. Spend time imagining your life in a smaller home. Make sure you are making a decision you will be comfortable with in five or ten years, not just today.

Remember that the right answer is the one that works for your specific circumstances. There is no universally correct choice between remortgaging and downsizing, and what works for someone else may not work for you. Trust your own judgement, informed by professional advice and a thorough understanding of the options.