Finance: Understanding Freeing Equity Versus Downsizing

4:45 p.m. 23 December 2021

There are many ownership-related processes that are relatively easy to come up with but considerably more difficult to perform; at the top of that list is the suggestion to downsize.

Arithmetic often sparks a growing interest in downsizing, with the math deemed worthy of closer examination by millions of people who paid off their mortgages as their home’s value rose simultaneously. Today, a steady appreciation in property values ​​over several decades has resulted in a significant number of former mortgage holders now sitting on small fortunes.

Cadastral figures show that between 1985 and 2020, the average property value increased by 783%. Some periods have seen more concentrated growth. The Halifaxes, for example, estimate that between 1985 and 1990 property values ​​rose 109%, while the 20-year period to 2021 saw an average appreciation of 207%.

A steady appreciation in property values ​​over several decades has enabled a significant number of former mortgage holders to now have small fortunes.
– Credit: Getty Images

Economists argue that while rising stock prices tend to have little measurable impact on consumer spending, there is much stronger evidence that the steady rise in property values ​​has a directly correlated effect on the economy. consumption. In short, rising real estate values ​​make us feel richer, which may be why, at least initially, the suggestion to move to a smaller location seems to make sense. Why not sell for £ x, buy a smaller house for £ y and cash in £ z? Sounds simple, doesn’t it?

In addition, the financial argument can quickly gain ground when supplemented with assumptions such as: the smaller house will be easier to maintain; it will be cheaper to heat; utility bills and municipal taxes will be lower, etc. But wait a minute.

Tired senior adult couple resting on sofa with cups of coffee surrounded by moving boxes.

Many people choose to downsize because they think it will make more financial sense
– Credit: Getty Images / iStockphoto

Several important assumptions related to downsizing deserve much more attention.

For example, finding a new, smaller property in or near the local area that downsizing candidates wish to move to is not cheap and may not become available in a suitable time. Granted, the family home can sell out quickly, but this could force owners to rent expensive accommodation for an extended period.

Second, properties traditionally more suited to potential downsizing, such as bungalows or apartments, invariably have a higher price tag. Once stamp duty, investigation fees, legal fees, estate agency fees, and moving costs are factored in, the remaining balance, once the small property is purchased, could be significantly less than what was originally planned. And where to invest it?

Yet perhaps the most persuasive factor that determines whether people will downsize has nothing to do with money. For many people, it becomes evident that perhaps the biggest downside to downsizing is emotional wrenching, especially if they have lived in a house for a long time and raised a family there.

Many couples have lived in the same house for most of their married life. Their children were probably born and raised there. Friends from school stayed at home regularly; family birthday parties were organized in the garden; summer vacation planned in the kitchen; Christmases celebrated in the living room. Thousands of happy memories hold significant personal value and it should be noted that while moving to live in a smaller home is one option, it is not the only one.

Satisfied senior woman holding glass of wine talking with gray haired husband in garden

Freeing up equity allows people aged 55 and over to stay in homes already chock-full of love and happy memories
– Credit: Getty Images / iStockphoto

Freeing up equity allows owners to convert some of the equity accumulated in their property into non-taxable cash. The process allows people aged 55 and over to stay in homes already chock-full of love and happy memories.

Plus, as property values ​​have exploded over the past couple of years, there is a potential opportunity for homeowners to free up the same percentage of equity they could have made in, say, 2019 but receive more money not. taxable, thus taking advantage of soaring house prices. .

As the freeing up of equity has become more and more common and the preferred method by which thousands of people access the often considerable wealth accumulated in their homes, the market has responded accordingly. These days there are many products available that allow homeowners to stay where they are and not go through a difficult emotional tear; indeed, it is even possible to free up equity now with the intention of downsizing at some point in the future.

Before doing anything in a hurry, it is worth considering the possible pros and cons of downsizing and freeing up equity, as it is extremely important to have all the facts at hand. hand. Freeing up equity is not something people do every day: on the one hand, it can affect their entitlement to means-tested state benefits, but on the other hand, it can also play a role. major role in helping ambitious retirement plans come true.

A trained advisor can explain freeing up equity in more detail, which can leave many people wondering if there is a need to downsize.

About Vicki Davis

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