Less is more: Downsizing to grow your finances and enhance your lifestyle

Whether you’re an empty nester who has regained a few rooms from your adult children or you want to live a more minimalist life and cut down on your home maintenance, downsizing is an appealing option for many people looking for a lifestyle change. According to research by Finder, one in eight households are planning to downsize to a smaller property over the next 12
months – equivalent to more than 600,00 households. [1]

Not only can you use the sale of your home to fund the lifestyle you want, but there are also a range of financial incentives that make downsizing a good investment in your future, particularly if you’re a baby boomer – who account for 21.5 per cent of the population according to the 2021 Census – where there are healthy tax breaks involved.

Moving out of a bigger home that you don’t need (but has likely grown in value) to somewhere smaller that better suits your lifestyle offers both personal and financial benefits.

The personal benefits are specific to each homeowner, but the financial benefits are near universal. The most common financial advantages are:

● Downsizing frees up equity: The difference between the sale price of your old home and your new home can be a substantial amount of money you can use to fund your future.

● Reduction in living costs: Large homes often incur high maintenance costs, so downsizing brings down everyday household operation costs, giving you the opportunity to allocate your savings towards better things like holidays and the grandchildren.

● Tax exemptions: The Labor Government just introduced new legislation to encourage pensioners to downsize and receive an additional 12 months to be exempt from the social security asset test (a total of 24 months) before losing or receiving a reduction in their payments.

● Superannuation benefits: Superannuation benefits via the Australian Tax Office’s Downsizer scheme, which allows you and your spouse, even if that spouse is not the homeowner, to make tax-free contributions up to $300K to your respective super funds for those who are over 60 years old and if you’ve owned the home you’re selling for more than 10 years. Those funds can then be withdrawn tax-free at retirement.

● Family inheritance: Downsizer contributions can also benefit family inheritance; if you use a re-contribution strategy, you can reduce the tax paid by your adult children when they receive your super death benefit.

However, there are a few considerations to make in determining if downsizing is the right move for you. Here are some questions you should ask before you sell your home.

What kind of lifestyle do you want?

Many downsizers shift to a smaller living space because it’s more manageable, or they can afford to buy in a particular neighbourhood. Consider factors such as:

● Space requirements: you may not have children living with you, but do you need the spare room/s for guests or maybe even grandchildren? Or is your current home simply too big to manage?

● Convenience: Proximity to amenities that fit your needs, from hospitals and public transport to shops and entertainment

● Social relationships that may be affected by where you live: are you sad to leave good neighbours or looking forward to making new friends?

● Accessibility: have your access needs changed? Perhaps you need somewhere with a lift, or a single-storey home, or a different room layout.

● Fit for purpose: the kids have moved out and you no longer need that home office; maybe you want a smaller house with a bigger garden, a low-maintenance apartment, or you’re swapping the big house for a better neighbourhood.

Plan your future lifestyle by making a list of must-haves and nice-to-haves and compare your current home with your potential future home.

What are the challenges of downsizing?

One common challenge of downsizing is the misalignment of the buying and selling process when dealing with two properties. If you sell too soon, you risk needing to find temporary living; which is a situation 52 per cent of homeowners find themselves in, at an average extra cost of $8,300 [2] on things like rent, moving, and storage costs. If you buy too soon, you’ll potentially need to
service two mortgages until your old place sells.

Market forces also make it difficult to sell high and buy low around the same time: if the market’s hot and a good time to sell, you might be looking at a higher purchase price for your new home; if the market is slow and you’ve found a bargain to buy, then you could experience an uncomfortably long time to shift your old home.

What tools are available for Australians when downsizing?

Consider seeking a bridging loan, which uses the equity in your existing home to go towards your next one. A bridging loan allows you to find the perfect downsize to fit your desired lifestyle and reduces the pressure to sell straight away, so you can avoid the gap or the overlap while juggling two properties. You can also use part of the bridging loan for moving costs and make repayments once you’ve settled your new property – and you often have 6-12 months to sell.

For many homeowners, downsizing makes good financial sense and has a public benefit too: it frees more housing stock for upsizers. Movement in the property market, where all owners are able to find the most suitable property for their needs, is always a good thing. A financial solution in the shape of a bridging loan can give downsizers the best opportunity to buy right while minimising inconvenience and costs.

1 Finder, June 2022, https://www.finder.com.au/downsizing-australians-plan-to-sell-their-homes.

2 Based on an independent survey by Bridgit of 1,011 Australian homeowners, of which 266 respondents bought their next home after selling their existing property.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.