Downsizing your home simply means selling your large home and buying a smaller one.
There are many reasons people decide to downsize.
- Your kids may have left home and you want to enjoy your retirement in a new location on a smaller scale.
- The effort required to maintain a four bedroom home may simply be too much work, as you wish to live a low-maintenance lifestyle, or spend more time travelling.
- The opportunity to free up some extra cash can be appealing because you have the opportunity to increase your cash-flow in retirement or pay off your home loan debt.
- Younger couples may decide to downsize to reduce a large debt.
But you have to do it right. Here’s what downsizers need to consider:
- Think about how you will finance it
You might be tapping into built-up equity to end up debt-free, or refinancing your current loan to your downsized property. If you have enough equity in your family home, you may not need to worry about finance.
But if you do need to source a home loan, your situation may not be so straightforward.
Banks are reluctant to lend to older borrowers, particularly those over 50. Most lenders will require an exit strategy demonstrating how you will pay off your home loan. Perhaps you have an investment property to sell or will use some of your superannuation. You might have shares or other assets to sell. Whatever the case, you will have to document in writing how you intend to repay your debt.
Other aspects to think about are moving and downsizing costs such as stamp duty, real estate agents, solicitors fees, as well as removalist costs and service reconnection costs.
Work out the best option for your requirements; and get advice from your real estate agent, accountant, and financial advisor if you have any questions.
- Beware of buying before you sell
You should think twice about buying a new home before you’ve sold your old home. Signing a contract for a new home while the sale of your old one is pending can be risky and stressful. You could find yourself struggling to sell, or feeling pressured to sell for far less than you’d anticipated. Sometimes there is the option of entering into a contract subject to the sale of your property, however this is not preferred for most vendors, they want more certainty than that.
In the event you do buy a new home before selling your current home, you could opt for a bridging loan. Bridging loans are short-term home loans that help cover periods of cash flow shortage. They’re designed as temporary solutions to temporary situations, and if all goes well you should be able to pay off a bridging loan quickly.
- Monitor the market
When should you downsize your home can be difficult to determine because it’s dependent on your financial goals and needs. It’s a good idea to keep an eye on the property market to ensure you’re giving yourself the best potential for capital gains. If you’ve owned your family home for some time, you’ve probably built up quite a bit of equity and seen some strong capital gains.
You’ll also want to pay attention to recent comparable sales to see what price other homes in the area have been achieving, and speak with a reputable real estate agent who is active in your area for an overview of the current market trends.
- Be prepared to de-clutter
This could be one of the most difficult aspects of moving and downsizing. Selling the family home and downsizing is a monumental life event and there’s a lot of emotion and sentimentality attached to the memories and possessions you have spent many years acquiring
To successfully declutter, you’ll have to ruthlessly prioritise which items to keep and which to get rid of. This may include furniture, heirlooms or clothing you may be able to give away, sell, or dispose of.
- Think about your future needs
It’s worth the time to put some thought into your potential future requirements.
- Are you able to keep up with the maintenance required on your new property?
- Does the location of your new property meet your future social needs?
- Do you have easy access to amenities and interests?
- Are you likely to have family members moving back in with you in the future?
- You may need to compromise
Be aware of what you will and won’t compromise on as you shop around for a new home.
Firstly, make a list of things that are particularly important to you and you won’t compromise on, and then those things that you are prepared to be a little more flexible with.
It might be location to amenities, whether you can settle for a carport instead of a garage, or whether you may need to do a bit of upgrading to secure the best property for your future.
- Government incentives for senior downsizers
There are government incentives designed to encourage seniors to downsize, which means you can take advantage of tax and super benefits.
One major incentive is the one relating to super contributions. From 1 July 2018, people aged 65 and over will be able to make a non-concessional (or after-tax) contribution of up to $300,000 (or $600,000 for a couple) into their super from the proceeds of selling their home. The house you sell needs to have been your principal place of residence for over 10 years. You won’t need to satisfy the existing voluntary contributions rules, and you won’t need to worry about the restrictions on non-concessional contributions for people with balances above $1.6 million. You can also still make other voluntary contributions under the existing contribution rules and concessional and non-concessional caps.
Selling the family home is not an easy or simple decision. Before you do anything, consult a financial adviser on the tax and social security implications, and speak to family and friends.