Residential mortgages:
Downsizing
Moving to a smaller home can help you reduce borrowing, release money tied up in your property or find somewhere that better suits the way you want to live.
You may need less space, want fewer maintenance responsibilities or be planning ahead for retirement. Downsizing can also form part of a plan to repay an interest-only mortgage.
The financial outcome depends on more than the difference between two property prices. Your existing mortgage, moving costs and any borrowing required on the next home all need to be considered together.
Moving to a smaller home
Downsizing is often associated with retirement, but it can make sense at many stages of life.
Children may have left home, your working arrangements may have changed, or you may prefer to spend less on housing and more on other priorities.
A smaller property may be easier to manage, but it is worth establishing what you want the move to achieve before setting a purchase budget.
Choosing a home that fits
Consider the practical features that will matter over the coming years, including:
Location and proximity to family and friends.
Access to shops, healthcare and public transport.
Stairs, parking and ease of access.
Space for visitors, hobbies or working from home.
Garden and maintenance requirements.
Ongoing running costs.
A smaller home is not necessarily cheaper to buy or maintain. A bungalow in a sought-after location may cost more than a larger house elsewhere, while an apartment may carry substantial service charges.
The property should support your lifestyle as well as your financial plans.
Understanding the money available
Start with a realistic estimate of your sale proceeds after repaying the existing mortgage and paying the costs of selling.
Then allow for the purchase price and costs of the next property.
For example, selling a home for £600,000 with a £200,000 mortgage leaves £400,000 before costs. Buying the next property for £350,000 would leave £50,000 before selling, buying and moving expenses, assuming no new borrowing.
The £250,000 difference between the property prices is therefore not the amount available to retain: much of it has been used to repay the mortgage.
Your mortgage adviser can help establish the borrowing position, while your solicitor confirms the legal costs and applicable property taxes.
Reducing borrowing
Downsizing can provide an opportunity to repay your mortgage completely or reduce it to a more manageable amount.
The right balance depends on your income, savings, future expenditure and how much flexibility you want after the move.
Becoming mortgage-free
If the net sale proceeds cover the next purchase and all associated costs, you may be able to move without a mortgage.
This removes the monthly mortgage commitment, but you will still need to budget for insurance, maintenance, utilities and any service charges.
Consider how much accessible money will remain after completion. Using all available funds to avoid borrowing may leave little for repairs, emergencies or other planned expenditure.
Keeping a smaller mortgage
You may prefer to retain some borrowing so that you can keep part of the sale proceeds as savings or fund improvements to the next home.
A new mortgage remains subject to the lender’s requirements. Your income, expenditure, age, proposed term and retirement plans may all influence the options.
A smaller loan is not automatically approved simply because you have successfully maintained a larger mortgage. Your circumstances and the lender’s assessment may have changed since the original borrowing was arranged.
Monthly payments and the mortgage term
Reducing the loan can lower monthly payments, shorten the repayment period or provide a combination of both.
The result depends on the interest rate, repayment method and term.
Keeping a longer term may make payments more comfortable, but normally means paying more interest overall than repaying the same borrowing over a shorter period.
Compare the full repayment schedule alongside the monthly saving.
What happens to your existing mortgage?
Moving home usually means repaying the mortgage secured against the property you sell.
You may be able to transfer your existing mortgage deal to borrowing secured against the new property. This is known as porting.
Alternatively, a new mortgage with your existing lender or another lender may be more suitable.
Porting a smaller amount
Some lenders allow you to port only the part of your mortgage that you still need.
However, an early repayment charge may apply to the amount being repaid rather than ported.
For example, if your existing mortgage is £200,000 and you only need £120,000 on the next home, the £80,000 reduction may attract a charge under your current product’s terms.
Porting also requires the lender’s approval of the new property and the proposed borrowing. It is not an automatic entitlement to transfer the loan.
Comparing the alternatives
Your adviser should compare the cost of retaining the existing deal with arranging a new mortgage.
That comparison should include any early repayment charge, the rate available on the smaller balance, product fees and other transaction costs.
Where the remaining mortgage is relatively small, a substantial product fee can outweigh the benefit of a slightly lower interest rate.
Read more about porting a mortgage in our moving home spotlight.
Reviewing an interest-only plan
With an interest-only mortgage, the regular payments cover interest but do not reduce the capital balance.
The outstanding capital must still be repaid at the end of the agreed term.
If your plan is to sell and downsize, it is worth reviewing that plan well before the repayment date. Property values, mortgage balances and the cost of your intended next home may have changed since the mortgage began.
Does downsizing still achieve the intended result?
The key question is whether the sale will leave enough money to repay the mortgage, cover the moving costs and secure suitable accommodation.
Review:
A realistic current sale value.
The outstanding interest-only balance.
Any other borrowing secured against the property.
Selling and purchase costs.
The likely price of a suitable replacement home.
Any savings or other funds available.
Whether you would need a mortgage after moving.
A property can contain substantial equity without leaving enough to buy the next home outright.
Check actual asking prices and recent sales in the area you want to move to, rather than relying on a broad assumption that a smaller property will be sufficiently cheaper.
Allowing time for the sale
If selling is your repayment strategy, allow time for marketing, finding a buyer, conveyancing and completing your next purchase.
The end of the mortgage term is the date the capital becomes due. Putting the property on the market shortly beforehand does not guarantee that the sale will complete in time.
Reviewing the plan early gives you more scope to adjust the timing or consider alternatives if the expected figures no longer work.
If your plans have changed
You may no longer want to move, or the expected proceeds may be insufficient.
Depending on your circumstances, options could include:
Making lump-sum reductions to the balance.
Switching some or all of the mortgage to capital repayment.
Reviewing the term with your lender.
Refinancing under an alternative arrangement.
Each option needs to be assessed for affordability and eligibility. An extension or replacement mortgage should not be assumed to be available.
If your repayment plan is unlikely to clear the balance, speak to your lender and mortgage adviser early.
Continuing with interest-only borrowing
If you want an interest-only mortgage on the next property, the lender will need an acceptable repayment strategy for that borrowing.
Where a future sale is proposed, lenders may apply minimum equity requirements, loan-to-value limits and other conditions.
Downsizing now does not automatically establish a suitable plan for repaying another interest-only mortgage later.
Learn more about interest-only mortgages in our high value and private bank knowledge hub.
Costs and timing
The costs of moving can materially reduce the financial benefit of downsizing.
Depending on the transaction, allow for:
Estate agency fees.
Solicitor or conveyancer fees, searches and registration.
Applicable property purchase taxes.
Surveys and lender valuations.
Mortgage product or arrangement fees.
Upfront lender booking or application fees.
Broker advice fees.
Early repayment charges.
Any required indemnity insurance.
Removals, storage and temporary accommodation.
Repairs, adaptations or furnishing the next home.
Fees should be explained clearly, including when they become payable and whether they are refundable.
Visit the UK government’s dedicated Stamp Duty page for more detail.
If you intend to buy before selling, the funding needs separate consideration. The equity in your current home will not usually be available until its sale completes, and temporary finance brings additional costs and repayment requirements.
Planning the next stage
Downsizing works best when the property choice and financial plan support each other.
That may mean becoming mortgage-free, retaining a smaller mortgage or using the move to complete an interest-only repayment strategy.
Our role is to help you understand the borrowing options, compare the costs and establish what the move could leave you with once both transactions are complete.
It starts with a conversation.
Frequently asked questions.
Every client and every mortgage is different, but there are some questions we are asked regularly.
From affordability and deposits to complex income, expat mortgages and specialist property finance, our FAQs explain how different lenders may approach different circumstances.
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