The price of downsizing: 5 important financial considerations

Downsizing, or as money expert, Rachel Lane, prefers to call it “Rightsizing,” seems to be the hot topic at the moment. Some people see downsizing as an opportunity to make a ‘tree change’ or a ‘sea change’ and live life in a different place, at a different pace. Others see it as remaining close to their current home, friends, family and community they love with a home that is more easily managed. For some they want a new community where they feel safe, can engage more in sports or hobbies and develop new friendships.

While much of the focus of downsizing decisions is on the lifestyle aspects, it’s important to bear in mind that your downsizing decision can have significant financial implications.

Let’s explore some of the key financial costs and benefits. Some of these you may already be thinking about and perhaps some you haven’t turned your mind to as yet. Crunching the numbers on the costs and benefits can pave the way for a brighter future and help you avoid any nasty surprises.

Moving costs money but staying home is not free

Moving costs money, it’s one of the reasons why you want to get your downsizing decision right. How much your move will cost is going to depend on the house you are moving from and to. While there are the obvious expenses like removalists and real estate agent fees there can be other more substantial costs.

Typically, the big-ticket items are the home renovations in getting your current home ready to sell and stamp duty on the home you are buying. However, that doesn’t mean that not moving is free. If you choose to stay in your current home, then you may still need to undertake some renovations and modifications so that it can meet your needs now and into the future.

Sell or buy first

A common financial dilemma for downsizers is having to sell first to release funds for the deposit on the next home, however most people want to buy before they sell, so they know where they are going and when, and can arrange the sale to coincide with their purchase. The risk of selling first is that you need to move twice, renting or staying with family or friends while you find your new home.

A Downsizer Bond can help solve this problem by guaranteeing the deposit for you, so you can buy your new home but delay needing to pay anything until settlement. All you need to qualify for a Downsizer Bond is sufficient equity in your existing home. Using it makes the buying process easy because you can purchase your next home now, and sell your current home later with nothing to pay until settlement. Being able to buy before you sell can take a lot of stress and cost out of your downsizing decision.

Downsizing can downsize your expenses

One of the advantages of downsizing is the potential to reduce your home related costs.

Moving to a smaller, more affordable home, can enable you to repay debt or significantly reduce your mortgage payments. Your new home is likely to have lower property taxes, utility bills, and maintenance expenses. Depending on where you downsize to you may find that other day-to-day expenses may be lower too, for example you may spend less on transportation, entertainment, sporting or other memberships depending on where you downsize. These savings can free up funds that can be used towards other expenses or used to bolster your retirement savings.

Downsizing can increase your investments

When it comes to downsizing, a common financial objective is to free up equity from the current home. Sometimes this is about having money to spend on a new car, boat, caravan (or perhaps all three). But for many people it is to provide a cash injection into their investments.

Back in July 2018, the government introduced the Superannuation Downsizer incentive which enables people who are eligible to contribute up to $300,000 from the sale of their home to their superannuation without the normal tests and restrictions. For couples this can mean up to $600,000 from the sale of the home can be contributed to their superannuation.

Topping up your investments can give you peace of mind that there is more money for an emergency and a better cash flow to fund your lifestyle.

Watch out for pension entitlements

While freeing up equity to spend or invest can be enticing, if you get the Age Pension you need to make sure you understand the impact on your payments.

The amount of Age Pension you can receive is based on asset and income tests; the test that produces the least amount of pension is the one that is applied.

The asset test is the one that usually bites downsizers the hardest. That’s because once your assets go over the threshold ($301,750 for single homeowners and $451,500 for couple homeowners) your pension reduces by $7,800 per year for each $100,000 of assets. Even with interest rates bouncing back it is an income that may be impossible to replace.

If you get it right, downsizing can have a positive impact on your physical, emotional, and financial wellbeing. Remember, when it comes to downsizing decisions there are no “right” or “wrong”, only decisions that best suit you.

The information provided in this article is purely factual in nature and does not take into account your personal objectives, situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular needs, financial situation and objectives.