Downsizing - What Makes Financial Sense?

tightauldgit

So at the moment I am living in my former matrimonial home which is a 4 bed detached and way too big and expensive for me to keep running on my own and I'm exploring my options. I do have a mortgage on the property which to be honest is too expensive for me to maintain in terms of income, but I have had a recent inheritance which will allow me to pay it off in full if I choose to. I really don't know what the best route forward is, especially with inflation being as it is and interest rates being so low it would seem that keeping the money invested in property might well be a good idea. So thought I would ask the collective for thoughts to help me puzzle through it. 

Option 1 - Stay Where I Am

So this would involve paying off the mortgage in full to remove that burden from me and just staying put. From a practical point of view it's the easiest option but it still leaves me with a house that is too big (and to be honest I'm not really happy here) and with the financial burden of huge council tax, utilities etc. It also keeps my money tied up in the house, but that might actually be a good thing in some ways too.

Option 2 - Rent Out My Home and Rent a Smaller Place

I like this option on the face of it as it would let me keep the big house as an investment but take away the running costs and let me move out and find somewhere I would be happier. On the downside I just can't seem to make it work financially as unless I am missing something the rental income is going to be classed as taxable income so once I pay for costs, take off the child maintenance hit I would get on the higher income, pay tax on the rental income and then factor in the rent I would be paying on a smaller place I'd actually be worse off financially! 

Option 3 - Sell Up and Rent/Buy Somewhere Smaller

If Option 2 isn't a goer then selling up seems like the smarter plan but I'm wondering if that is a stupid move to take myself out of property and potentially be left with a wad of cash slowly losing value. Selling up and renting a new place seems like the worst of both worlds as I then have a new outgoing rent every month without a corresponding income so all I would be doing is slowly eating into my savings. I can't really see any relatively risk-free investment that is going to match the return of a rental yield but even if i do then it it's only effectively putting me back in option 2 as that income is going to be subject to CMS payments and tax. 

In the medium term I still haven't really decided what to do with myself and I do have a thought to move overseas at some point in the next few years. The original thinking was to rent out the current house and basically use that as income to fund living somewhere very cheap overseas but whether that's feasible remains to be seen.

Appreciate the above might be seen as a bit of a first world problem but I guess it boils down to the fact that I am potentially 'asset rich' but with a low income. I'm just wondering if I'm missing anything or there are tax-efficient ways to convert assets to income that I am unaware of. The only other thing I can think of would be to use my pension fund and deposit as much as I can in there but not sure if that's sensible or not?        
 

simon_or

Option 3 Sell and Buy seems like a no-brainer to me.

Imho, Option 2 sounds like the worst option of the 3.

gwynlas

These days it is hardly worthwhile becoming a landlord so you are probably best off selling your current property and  buying a smaller property that would be more affordable for you to run. Where do you thnk you might live more cheaply and is this wishful thinking or a viable option? Would you wish to return to UK when elderly?

thegreenone

Buy a smaller, lock up and leave (if you can) style property so you will be free to move abroad and either keep it empty or rent it out.

tightauldgit

gwynlas said:

These days it is hardly worthwhile becoming a landlord so you are probably best off selling your current property and  buying a smaller property that would be more affordable for you to run. Where do you thnk you might live more cheaply and is this wishful thinking or a viable option? Would you wish to return to UK when elderly?

The high-level plan was to give it a couple of years and then look to move to somewhere like Thailand or Indonesia - using the rental of the UK property to give me a 'liveable but not rich' income. Running the high level numbers it's viable and if it's a sole UK income then tax is a little less of an issue since most of it would be offset by my personal allowance. 

In some ways I wouldn't want the stress of maintaining a UK property while being abroad, and I'm not fussed about the idea of returning at any point. But it probably makes sense to keep the option open. 

The question is if I did sell the property then what could I do with the cash that's going to give me a similar yield? At the minute the answer seems like nothing else would unless I invest in high-yield stocks but that's going to be a gamble. 

What I don't want to do is make the mistake of cashing out and then start eating into my nest egg and running out of money when I'm older. 

Scotbot

Don't even consider option 2 before reading this guide which explains your legal obligations https://forums.moneysavingexpert.com/discussion/5180214/tenancies-in-eng-wales-guides-for-landlords-and-tenants/p1
There are costs  involved and you will make less than you think plus if your tenant defaults on the rent you are looking at over a year with no rent before you can evict them.

It makes more sense to go with option 1 then sell once you have decided what you want to do medium term

Linton

What about selling the big house and using your inheritance to buy a similar priced smaller but more desirable one?  More attractive area, nearer amenities etc etc.  It may provide better protection for your money and rou could have the option of equity release when seriously old if you needed extra cash.

pinkteapot

Sell and buy somewhere cheaper, that’s cheap to run (check energy efficiency etc). A wad of cash doesn’t have to lose value - plenty of investment options.