As a result, many of them may find themselves sitting on a substantial amount of wealth that has built up in their homes over the last few decades, but, with the rising cost of living, might be cash-poor.
While there are various solutions on the market to help these borrowers, downsizing to a smaller property can often be overlooked. One of the many benefits of downsizing in retirement is that it frees up capital tied to a larger property. For homeowners in, or approaching, their retirement years, this can prove an attractive way of boosting their income in later life.
According to recent analysis conducted by Savills, there are 1.29 million owner-occupiers aged 65 and over living in a four-bedroom house in England and Wales. The report states downsizing to a two-bedroom home has the potential to unlock an average of £305,090 for each of these households.
For brokers with clients looking to maximise their retirement funds in later life, exploring the opportunities available through downsizing could prove a useful tool in helping them boost their retirement income.
A viable alternative to equity release and RIO
Our interest-only option with a property downsizing proposition, for example, allows retired homeowners or those approaching retirement to raise funds while paying just the interest on the mortgage each month.
Repayment of the capital balance is left until the end of the mortgage term, when the borrower downsizes to a lower-value property.
This type of borrowing can be a useful alternative to equity release where the value of the homeowner’s estate reduces over time, or retirement interest-only (RIO) products where the mortgage is repaid when the borrower moves into long-term care or dies.
Not only does an interest-only with a downsizing proposition provide borrowers with a repayment vehicle for exiting the loan (their larger home) when they downsize, it also enables them to keep all the equity in their new home once they move.
Eventually moving to a smaller home can also prove to be a suitable option for those borrowers who appreciate that downsizing would suit their lifestyle in later years but still want to enjoy the benefits of living in a larger house for the time being.
A flexible approach to enable retired borrowers
Unlike RIOs, where affordability for a mortgage taken out on a joint basis is typically stress-tested against each income individually, a more common-sense approach can be taken with downsizing.
When one member of the couple has a much smaller pension income than the other, that can play havoc with the sums that can be borrowed through a RIO mortgage, making it less practical as an option.
An individual approach to underwriting means borrowers can be assessed separately to include their pension income beyond the age of 70 if needed.
Easing the cost of living and more
In many cases, downsizing can present later life borrowers with greater capacity than the maximum borrowing offered by some high-street lenders and potentially even RIO.
Not only can it give their retirement funds a significant boost, we can accept debt consolidation, allow for home improvements, or even allow for the borrowers to gift a deposit to help a loved one onto the housing ladder.
By unlocking interest-only with downsizing, retired homeowners can feasibly release the value of their assets to ease the cost-of-living squeeze.
