The low-down on downsizing

29 Jul 2015

Your home is more than just a financial investment – it’s an important piece of your personal history and full of rich memories. However, selling it may be a great way to unlock your wealth and support your changing lifestyle. Here’s how to get started.

Choosing to sell your family home to downsize is not just a practical and financial decision, but one that has an important emotional element.

“For every person who leaves the family home, there is some aspect of it that is an emotional wrench,” says Janet Spencer, principal of Melbourne-based buyers’ agent Buyer Solutions. “It can be quite traumatic, but there is an enormous upside as well.”

The good news is that by properly preparing for downsizing during retirement, you can avoid significant stress and hassle, and most importantly, have time to make the right decision. That choice could be to sell and move, or to even stay in the family home.

Lightening the load

According to industry body, Senior Australians Equity Release (SEQUAL), some 90 per cent of Australian couples over 65 own their own home. That’s the highest proportion in the world. The combined value of equity in their properties is estimated at more than $800 billion.For many baby boomers, their home is their greatest source of wealth.

Wally David, a financial planner with Financial Planning Matters, says most of his clients have tended to downsize for practical reasons, then moved to smaller one-floor houses closer to amenities.

But David expects more senior Australians to downsize to unlock that equity to help fund their retirement and pay off their mortgages so they are debt-free.

Apart from financial aspects, there are a number of benefits to downsizing. Spencer says moving to a smaller property can “minimise maintenance and maximise lifestyle”.

She says pools and big gardens can become a burden as we age.

A smaller property allows retirees to spend more time on things they enjoy.

Downsizing also provides more freedom to travel. Spencer says

that more and more clients are saying they want a house they can ‘lock and leave’ quite frequently.

It can also reduce overheads such as rates, water and power bills.

It’s time to get ready

However, both Spencer and David say downsizing is a big step and needs to be carefully planned and thought through.

Spencer notes that selling and buying a house is expensive. In Victoria, for example, stamp duty paid on a new home is 5.5 per cent. There are also agent’s fees and moving costs.

Spencer says retirees should try to futureproof their downsizing by thinking long-term and buying the right property.

One client was looking at a house in the Melbourne suburb of Malvern which had an upstairs main bedroom. They didn’t buy it because they were worried about access when they were older. They bought a house with a lift in it instead.

Spencer says that downsizing to the beach or bush also needs to be considered carefully because “as we age, we need access to good health and support systems”.

Of course, the outcomes of that deliberation may be to stay at your existing home, which David says is becoming more feasible with home services. “The option of staying put and bringing in help shouldn’t be discounted,” he says.

David agrees the most important thing is to start the process early, rather than wait for financial or health reasons to trigger the need for a sudden move. He notes that as we age, downsizing becomes more stressful. But starting early also allows retirees to assess different options.

Part of the planning is financial. Your residence is not assessed as an asset by Centrelink. However, if you sell your house and have money left over after paying the mortgage off, it could have implications for your pension.

According to David, depending on the individual situation, retirees could lose some of their pension payments, though he adds the residual funds could be invested and generate a return.

David warns retirees not to buy a new property before having first sold their original home.

“It’s one of the first things I say to people,” he says. “But I still have instances where they haven’t. It can put extra stress on the situation.”

He also recommends taking care when looking at options like retirement or lifestyle villages.

“They are a popular and valid option, but the contracts look very different to a standard real estate contract and they can be quite complicated.”

Downsizing is a significant decision for retirees. Spencer says many people have tended and loved their homes for years, which makes a move particularly emotional. But there are also financial and practical upsides to downsizing as well. The key is to plan early, so it is a decision you’re happy with, rather than one you’re forced to make.