This guide explores the reasons for downsizing, how it impacts your existing mortgage (from paying it off to reducing your balance), and whether you might still need a mortgage for your smaller property. We also cover what happens to any released equity, the associated costs, and important tax considerations. Discover how a smart downsizing strategy could open up new possibilities with IMC Mortgage Brokers.

Why consider downsizing your home?

You’re likely considering downsizing your home for personal reasons, but some motivations resonate with many homeowners:

• Financial freedom: Releasing significant tax-free equity from your current home.
• Lowering outgoings: Reducing monthly bills like utilities, Council Tax, and insurance.
• Less maintenance: Enjoying a more manageable property and garden.
• Lifestyle changes: Seeking a home better suited to your current needs, perhaps closer to amenities or family, or in order to adopt a more simplistic lifestyle.
• Retirement planning: Consolidating finances and potentially becoming mortgage-free to enhance your retirement years.

How downsizing impacts your existing mortgage

When you sell your larger home and buy a smaller one, what happens to your current mortgage? It largely depends on whether you’re becoming mortgage-free or just reducing your borrowing.

1. Paying off your mortgage entirely: If the sale proceeds from your current home, after all costs, are enough to cover the purchase of your new, smaller home outright, you could become entirely mortgage-free. This could be a huge financial relief, eliminating monthly repayments and freeing up income.
2. Reducing your mortgage balance: If you still need some borrowing for your new, smaller home but need to borrow less than your current mortgage, you might reduce your outstanding mortgage balance. For instance, if your current mortgage is £200,000 and your new home requires a £100,000 mortgage, the £100,000 difference is effectively paid off.
3. Potential Early Repayment Charges (ERCs): If you’re currently in a fixed-rate or tracker mortgage deal, paying off, or significantly reducing your mortgage balance before the deal ends, could trigger an Early Repayment Charge (ERC). This is a penalty fee from your lender. It’s crucial to factor this into your calculations. Your IMC Mortgage Broker can help you assess if any potential ERCs are outweighed by the benefits of downsizing your home or securing a new, better deal.

Do you still need a mortgage when downsizing your home?

Even when moving to a smaller, less expensive property, you might still need a mortgage. This could be because:

• You don’t want to use all your released equity: You might prefer to keep some of the released equity as savings, for investments, to help family, or for a ‘rainy day fund’, rather than sinking it all into the new property.
• The new home is still more than your available cash: While smaller, property prices can vary greatly by location. You might find your ideal smaller home still requires some level of borrowing.

In these situations, you could explore options like:

• Traditional mortgages for smaller amounts: Many lenders offer standard residential mortgages even for relatively smaller loan amounts. The process is similar to any other mortgage application, with affordability checks based on your income (including pensions if retired) and outgoings.
• Retirement Interest-Only (RIO) mortgages: If you’re aged 55 or over, a RIO mortgage could be a suitable option. With a RIO, you only pay the interest each month, and the capital is typically repaid when the property is sold, usually upon your death or moving into long-term care. This could allow you to keep more of your equity upfront while still having a manageable monthly payment. You’ll need to demonstrate affordability for the interest payments.

What happens to released equity?

One of the most appealing aspects of releasing equity through downsizing your home, is the financial flexibility it could offer. The cash sum you release from your larger property, after paying for your new home and all associated moving costs, is yours to use as you wish. Common uses include:

• Boosting your retirement fund.
• Making home improvements to your new, smaller property.
• Helping family members (e.g., a deposit for a child’s first home).
• Paying off other debts.
• Creating a financial buffer for future needs.

Associated costs of downsizing your home

While downsizing your home could free up capital, it’s important to be realistic about the costs involved in any property move. These could include:

• Stamp Duty Land Tax (SDLT): You’ll pay SDLT on the purchase of your new, smaller home based on its value. Even if the value is lower, it’s still a significant cost to factor in.
• Legal fees (conveyancing): For both selling your old home and buying your new one.
• Estate agent fees: For selling your current property.
• Mortgage arrangement fees: If you take out a new mortgage or a new part of a split mortgage.
• Valuation and survey fees: For your new property.
• Removal costs: The expense of moving your belongings.
• Other disbursements: Such as Land Registry fees.

For a more comprehensive breakdown of all potential expenses, explore our detailed guide on Home Mover Costs & Fees Explained.

Pros and cons of downsizing

Downsizing could open up a wealth of opportunities, but like any significant life change, it comes with both benefits and potential drawbacks.

Pros:

• Financial freedom: Potentially release a substantial tax-free lump sum from your home equity.
• Lower living costs: Reduced mortgage payments (or none at all), lower bills, and less maintenance.
• Simplified lifestyle: Less space to manage and fewer possessions to look after.
• Opportunity for a fresh start: A new location or a home better suited to your current needs.
• Reduced financial stress: More disposable income for leisure or unforeseen expenses.

Cons:

• Emotional attachment: Leaving a cherished family home can be emotionally challenging.
• Moving costs: Despite releasing equity, the transaction costs could be significant.
• Less space: This could mean less room for hobbies, guests, or storing possessions.
• Impact on inheritance: While releasing equity could be beneficial, if you spend it, there might be less property value to pass on.
• Finding the right property: It can sometimes be challenging to find a smaller home that meets all your new requirements and is genuinely less expensive in your desired area.

Tax implications to consider

When releasing equity or downsizing, it’s important to be aware of potential tax implications, though most people will not pay Capital Gains Tax on their main home.

• Capital Gains Tax (CGT): In the UK, you generally do not pay Capital Gains Tax when you sell your main home (your primary residence), thanks to Private Residence Relief. However, this could change if you’ve used part of your home exclusively for business, or if you bought it solely to make a gain. It’s always advisable to confirm your specific situation.
• Inheritance Tax (IHT): If you release a significant amount of equity and then gift it away, it could potentially fall under Inheritance Tax rules, depending on the amounts and how long you live after making the gift. If you keep the money, it becomes part of your estate for IHT purposes.

Please note: IMC Mortgage Brokers are not tax advisors. We strongly recommend seeking independent financial and tax advice to understand how downsizing could affect your individual tax position.

Considering downsizing your home and keen to understand your mortgage options? Contact IMC Mortgage Brokers today for a free, no-obligation consultation. We’re here to help you make a confident, informed decision for your next exciting chapter.