Should I downsize to save energy costs?
WITH house prices at reasonably good levels, inflation and the cost of living at bad, but ludicrous levels, it's easy to see why some are considering downsizing or selling and renting.
Undoubtedly with inflation continuing to surprise on the upside, more upward pressure is being placed on interest rates which will, in turn, put house prices under further pressure as households do not have the capacity to spend, alongside increasing energy costs.
Will the time come when houses are taxed based on their ‘dirty' energy consumption? Yes, I think so. In fact, I think that is inevitable, as governments seek to hit sustainability targets. A council tax reduction with net zero houses, might go hand in hand with extra charges for those with poor energy ratings.
When I completely changed my home from an energy efficiency point of view, the primary driver wasn't sustainability or the climate. It was to take the greedy hands of the ‘dirty' energy companies out of my pocket.
Today, those with large, or older houses, are caught with exorbitant bills and a crossroads. There are options. One option is to borrow against the home and retrofit the house to cut down on the loss. This will save future energy bill rises and potential house tax rate hikes, but this saving could also be budgeted to pay for the extra costs of the borrowing.
Option two may be to downsize. Those considering downsizing must remember the costs of moving. Removal vans, redecorations, financial adviser chaps like me, estate agents, stamp duty, surveyor and solicitor's fees are some of the obvious costs, let alone those on the periphery, which can soon mount up (storage, mortgage penalties etc). On a £350,000 house, these fees can easily top £20,000. Saving these costs would put a large hole in any deep energy retrofit and insulation plan (start with the insulation).
On top of this, we can see that based on average property prices, moving to an energy performance certificate of C, or above, increases the value of the home by as much as 10-14 per cent.
Consider also the time and stress of selling and moving and the emotional attachment we have to our homes.
Another option of course is to raise capital against the property via equity release for the improvements and/or raising cash to live on, rather than selling to release the cash.
Upsides of equity release: You are already quid's in against the aforementioned fees to start with. If you sell, you also have to put the cash somewhere otherwise it will be losing around 10 per cent per year on inflation. If you don't want to take cash as a large lump sum and pay interest on it as its losing via inflation, you can also elect to take withdrawals.
Some equity release companies also allow you to repay interest as you go along. Furthermore, you may have a pension plan that you want to have access to now which would have a significant impact on the pension fund for early access. If you leave the pension to the correct date for access, you will avoid penalties, allow the fund to grow appropriately and can then use the tax-free lump sum to repay the equity release.
Remember, accessing the pension earlier loses inheritance tax breaks and should be avoided where possible.
An upside of selling may well be that you capture some of today's elevated prices of course, and only time will tell what the real gain will be here. Another key benefit would be to buy into a passive energy home. A correctly built home today will have very low energy bills. Furthermore, it may be a time to use that extra cash available to invest into an electric car, one that can be charged from your solar panels.
Another consideration is of course a short-term loan which despite the history of the cost of such loans is actually no longer the case with rates being close to mortgage rates.
No matter which way you choose, consider advice from an independent financial adviser only as opposed to someone who is tied to just one provider. Furthermore, talk it through with family and those around you so that you are making objective choices.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice on equity release or loans call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net