What you should know before you buy a retirement home (and make a costly mistake)

As you get older, you may find your housing needs changing. Maybe you bought a house to accommodate children who have since flown the nest, and you find yourself with a property that is bigger than you need.

Perhaps you’re longing to be around people your age – or you’ve got health concerns that mean you’d like to have a bit of extra support available. 

In all of those situations and many others, you might find yourself drawn towards retirement homes. Many people find happiness in retirement homes, but they can also be a minefield with some experts saying retirement housing could be “the worst investment” you make.

But is that fair? Telegraph Money talks to the experts to find out what you need to know before buying a retirement home. 

How much does a retirement home cost?

Retirement home costs vary dramatically across the country. In London, the average price for a one-bedroom flat is £708,200, according to Lottie, a directory. A two-bedroom retirement property costs around £800,000. But in Yorkshire the average price paid is £214,927 for a one-bedroom and £305,399 for a two-bedroom flat. 

Who are the main retirement home providers?

The biggest private retirement home builders are McCarthy Stone and Churchill Retirement Living. McCarthy Stone has been managing the sites it builds in recent years, but some of its older builds are now managed by third party companies. Many older McCarthy Stone developments are now managed by FirstPort. 

McCarthy Stone operates 475 developments across the UK for more than 20,000 people and has a rating of 4.7 on Trustpilot, a reviews site. Churchill manages more than 200 retirement developments in the UK and has a rating of 4.3 on Trustpilot.

Other big companies in the market are Guild Living, Inspired Villages, Audley Retirement (4.7 on Trustpilot) and Anchor Hanover (3.3 on Trustpilot). Guild Living and Inspired Villages are both backed by Legal & General.

Retirement homes vary in terms of the level of care and support provided. Some promote more independent retirement living while others are billed as integrated retirement communities which offer more care. 

The Association of Retirement Community Operators has both not-for-profit and for-profit member companies that offer integrated retirement communities. Retirement homes generally offer more support than a regular home but less than a care home.

As in the conventional property market, there are also “shared ownership” schemes for retirement homes which are run by housing associations and private companies. 

This allows you to buy a share of a home, and increase your stake gradually if you accumulate more funds, known as “staircasing”. However, you will have to pay rent on the remaining portion of the home you do not own. 

How do you find a retirement home?

Finding a retirement home isn’t too different from finding a typical home. They’ll often be advertised on property websites such as Zoopla or Rightmove, or you could get direct to one of the developers listed above.

The Elderly Accommodation Counsel also has an online database of retirement sites which can be a very useful research tool. You can search the database to find retirement homes in your area. 

You typically have to be over 55 or 60 to live in a retirement home. You may also need a doctor’s letter to confirm that you are able to live independently rather than needing more support provided by a care home.

Do you have to buy a leasehold property?

Most retirement homes are sold as leasehold properties. The leasehold sector has come under intense scrutiny in recent years, as onerous terms and often very high service charges weigh on residents, who often don’t realise they are technically tenants, not owners. 

The Government has announced reforms to the way leasehold operates, but these have been delayed until after the election. It is possible to buy a freehold but they are often on estates with leasehold flats so you will still face large service charges to help pay for communal facilities and services. Residents in some freehold retirement homes say they pay less in service charges than those in leasehold homes. 

Should you buy, or is renting a better option?

There have long been concerns that retirement properties make poor investments because the properties can lose value when they are resold. Selling the homes can be more difficult because there is a smaller pool of eligible buyers and so the market is far less liquid than the conventional property market.

It is worth considering whether renting would be a better use of your money. Matt Cohen, an executive at Propertymark, a trade body for estate agents, said renting does not require such a big initial outlay but also does not offer the same security of owning your own home. 

Most people buying a retirement home will be downsizing from larger homes they own outright and paying in cash, so cost may not be a big consideration for them.

A large part of the appeal of retirement villages, for residents and their families alike, is the idea of living in a community of people of similar ages.

However, Mr Cohen warned, if you are in your 60s and you move into a development where everyone else is in their 80s and 90s, “it may make you feel that much older”, he said.

“If you’re not needing the extra security they come with as well, for example, care line systems which send alerts out if you have a fall, then you’re probably better off downsizing initially to a standard apartment, and then later down the line, when you do need those extra facilities, reconsidering a retirement property.”

Sebastian O’Kelly, chief executive of Leasehold Knowledge Partnership, a property campaign group, said renting is a good option that avoids many of the pitfalls of buying and is worth considering.

“If you insist on buying, buying a resale is a good deal better value because the often catastrophic fall in value will have taken place,” he said. “The property could be considerably cheaper.”

Should you buy a new build or resale property?

It is typically cheaper to buy a retirement home that is not new. As in the conventional property market, new-build properties often come with a premium, just as new cars do. If you’re buying a new property, be aware that you may not be able to sell it for more than what you paid, Mr Cohen said.

As with other property purchases, you can usually negotiate on the price. The market has slowed recently, said Mr Cohen, so it should be possible to get a reduction on the asking price. On new builds, developers are more reluctant to reduce the sticker price but are willing to throw in extra incentives such as fittings, better carpets, paying for your stamp duty or legal fees.

Check previous sale prices for similar properties on Zoopla and Rightmove to help you make an appropriate offer.

How can you avoid getting ripped off by service charges?

Service charges in retirement homes tend to be high compared with other flats. It’s not unusual to pay thousands, or even as much as £10,000 a year, said Mr Cohen.  

This is because they come with extra facilities, such as an on-site manager, communal facilities, residents’ lounges, guest suites, laundry rooms and so on.

It is worth considering what the amenities are: if you’re not going to make use of them, you are likely to feel that you are paying too much. If you want something with lower service charges, look for developments with fewer facilities. 

Going with a not-for-profit retirement home provider could be a good option if you’re worried about getting lumbered with extortionate fees, said Mr O’Kelly.

He recommended looking at the ExtraCare Charitable Trust, the Methodist Housing Association, or Jewish Care. 

“These are excellent organisations with a hugely loyal following among consumers or in their communities in the case of the Methodists and Jewish Care,” he said. “I haven’t had any complaints from people living in any of them, so they’re obviously doing something right.”

Visit the development and talk to the people who live there to find out what the management and service charges are like. 

Ask residents about the insurance costs, if there are any major works in the pipeline these could push up service charges. You should also inquire as to whether the contingency or “sinking” fund – typically funded by service charges – has reasonable reserves that could cover any emergencies. If there is a new roof needed or some other unforeseen expense, residents could find themselves hit with a sharp jump in service charges to cover the shortfall.

Make sure your solicitor pores over the contracts and alerts you to all potential charges. If the ground rent is too high, the property could be hard to buy with a mortgage and could deter future buyers. Typically lenders want ground rent to be below 0.1pc of the value of the home.

Some ground rents are more than £1,000 in retirement homes because they rise with inflation. However, new-build retirement homes can no longer charge ground rent as the Government outlawed it last year.

How do you avoid leaving your children with big costs to pay when you die?

It can take months, or even years, for some retirement properties to sell in some areas, as The Telegraph has previously reported.

During this period the service charges are typically still due even if the flat is unoccupied, meaning the previous owner’s families might be forced to pick up the bill. Inheritors can also end up taking a hit on the value of the property. It is not unheard of for properties to sell for as little as £30,000. 

Some housing associations offer extra protections to guard against this. For example, the ExtraCare Charitable Trust will buy back a retirement flat at 95pc of what you paid for it.

Mr O’Kelly said: “This is very useful because it underwrites the value of the property. The value only goes down 5pc, but that 5pc goes into running the ExtraCare Charitable Trust communities. 

“After your elderly relative dies, the whole property is resold by the ExtraCare Charitable Trust pretty quickly, so there’s no question of the flat hanging on the market for one, two or three years, costing a fortune.”

The Methodist Housing Association has a similar scheme but it is discretionary, so you may have to opt in to its buyback scheme.

How much should you pay in exit fees?

When you sell the retirement home, you will likely have to pay an exit fee, which helps pay for the costs of the development. These fees can vary considerably across providers so it pays to do your research. Some sellers have started calling these “event fees” – so beware if you see this as it’s not as festive as it sounds. 

Integrated retirement communities – which sit between retirement homes with very limited amenities and fully-fledged care homes – have more predictable service charges but can have steeper exit fees of up to 30pc of the resale price. But this may be a better option if you want to better predict what your costs are going to be in the future.

Those inheriting the properties can be unhappy about exit fees but some retirees would prefer to have some fun now and make the most of their money rather than try to preserve the value of their inheritance. 

Exit fees tend to average around 12pc, according to the Leasehold Knowledge Partnership.

“We don’t have a problem with exit fees as long as they’re very clearly indicated and they’re for designated services,” Mr O’Kelly said. “So if the exit fee pays for the gym and the gym closes, then you don’t pay the exit fee.”

Mr Cohen warned that the fees are also payable if you want to rent out the flat, which can be a flat fee or a percentage of the rent. 

What else should you look out for?

Pay close attention to the length of the lease. Anything below 80 years is considered a short lease. It can be easy to overlook if you don’t expect to live that long, but this can sting your relatives who inherit the property. It can be difficult to sell a property with a short lease because lenders may refuse to grant a mortgage on it. Extending a short lease can also be expensive. 

Do you own a retirement home? What has your experience been like? Please email alexa.phillips@telegraph.co.uk if you have a story for us.