Should you downsize to a retirement development?

Retirement homes can be expensive to live in and then lose value when resold. Are they worth the cost, asks Sam Barker

As people age, their housing needs change: children have flown the nest and the stairs may start to present a challenge. Those looking to downsize may find the idea of buying a home in a retirement development appealing. But is it really worth it?

Retirement villages are custombuilt communities designed with older people in mind. Homes are made accessible, maintenance may be taken care of and some sites offer medical care. These developments also allow retirees to live among their peers, with communal areas and social events.

As the population ages – 18pc of Britons are over 65, according to the 2016 census, up from 15.9pc a decade earlier – one would expect retirement communities to be becoming more popular. But the British seem less interested than other nations in living in retirement homes.

Just 0.7pc of over-65s in the UK live in retirement villages that contain on-site care, according to JLL, a real estate firm. In Australia the figure rises to 5.4pc, and to 6.1pc in the United States.

This could be because stamp duty discourages people from downsizing. A study by retirement advisers Key also found that many over-65s could not find suitable homes or believed downsizing did not make financial sense.

The set-up of retirement villages can be confusing and expensive – and, unlike most other properties on the market, many purpose-built retirement properties lose value when resold.

JLL said around one in five homes in retirement villages with care facilities made a loss when resold between 1995 and 2016.

Elderly Accommodation Counsel, a charity, put that number higher. Its analysis of Land Registry data found that 51pc of retirement homes under six years old resold between 2006 and 2016 had fallen in value. The average resale price was 17pc below the original value, but in some cases was more than 50pc lower. Nearly two thirds of resales between 2015 and 2017 made a loss.

Philip Schmid of JLL pointed out that the financial crash of 2008 hit resale prices across the market, particularly new-build developments.

He added: “The other big thing to consider is that, when these flats come up for resale, frankly it is because the person who lived there has died.” As a result, he said, their family may favour a quick sale over getting the best price. Even before they come to sell, people who live in retirement properties can face high and confusing fees.

Although mortgage options are increasingly available for older buyers, these homes are normally bought with cash from downsizing.

This lump-sum payment rarely covers the total value of the home. Instead, buyers will pay the rest as ground rent at regular intervals, or at the end when they die or move out by leaving a percentage of the resale value to the developer. This is known as an “event fee”.

Developers say charging these fees allows them to reduce the upfront cost of the properties, making them more appealing. But this system has also been used to overcharge the elderly.

A report published last year by the Law Commission, which oversees British laws, found “major problems” with event fees. These included hiding the fees in complex contracts or charging residents for unexpected events other than selling the home, such as when a spouse or carer moves into the property.

The report said some developers told buyers about the fees too late in the buying process for them to do anything other than accept.

The Law Commission accepted that event fees could help affordability, but called for them to be regulated. Arco, the retirement housebuilders’ trade body, backed the proposals and the Government is still considering them.

Ground rents are another problem for people who live in retirement properties.

At a recent meeting in the House of Commons, Joe Oldman of the charity Age UK criticised ground rents for being untransparent and not linked to any obvious benefit for the purchaser.

Clive Fenton, chief executive of McCarthy & Stone, Britain’s largest retirement developer, said ground rent charges were necessary because otherwise the upfront price of the properties would have to be higher, which could deter potential buyers.

Different retirement housebuilders have varying approaches to charges, which buyers may find confusing.

McCarthy & Stone charges an average yearly ground rent of £466 for the first 15 years. It is then increased either by inflation or by 2pc a year, whichever is higher, with the interest compounded yearly. The firm “securitises” the ground rents, selling them on to investors for a lump sum.

Audley Group, another retirement developer, charges average ground rents of £500 a year and takes an event fee of up to 15pc of the resale price.

Churchill Retirement Living, another housebuilder, charges the same average ground rent, increasing it every seven years in line with inflation. When the homes are resold, retirees also pay 1pc of the price.

A McCarthy & Stone spokesman said the fees enabled the firm to provide quality communal areas and were not a “windfall profit”.

An Audley spokesman said the ground rents “are a small part of our income and make little commercial gain” and that the fees helped it provide a high standard of service.

A spokesman for Churchill said ground rents were “vital for the retirement housing sector” as they helped pay for the communal areas.

In the worst case the difference in price between what someone from a product transfer would pay and a new borrower would pay was almost £50 a month – £600 a year.

Bank of Ireland was offering lower rates for product transfers for a fiveyear fix. Other lenders offering lower rates to their existing customers were Platform Home Loans, Accord and Nationwide.

A spokesman for Leeds Building Society said: “It’s important that applicants consider all aspects of their mortgage, as simply comparing headline rates may not result in the best deal for them.”

A spokesman for Bank of Ireland said: “Some differences can occur from time to time, including existing customer pricing. These differences can be due, for example, to timing or where some products have different features.”

NatWest said rates it offered directly were currently the same for new and existing customers, although it did offer some lower rates to those using a mortgage broker.

A spokesman added: “In line with our competitors, rates offered through brokers can differ; there are a number of reasons for this, including customers often having to pay a fee for this service on top of this rate.”

‘Ground rents are not linked to any obvious benefit for the purchaser’ In the worst case a new borrower would pay £600 less a year on their home loan

Clive Fenton, chief executive of McCarthy & Stone, said ground rents were necessary