Ten things you need to know about downsizing

Most people think of downsizing as something older folk do when the family home becomes too much for them. But downsizing - or, perhaps more accurately, 'rightsizing' - is not just about moving into a smaller place.

There are many reasons a homeowner might consider selling up and downscaling. It could reduce their mortgage repayments, free up money, or allow them to move to another area. In fact, you technically don't even need to move into a smaller place in order to downsize.

What is downsizing?

In real estate terms, downsizing can mean a few things.

Firstly, there's the obvious one: moving into a smaller home - or physical downsizing.

In the case of older Australians who are perhaps struggling to maintain their family homes and large gardens, moving to a smaller home can take some pressure off. This could perhaps offer better health and safety prospects and provide money to boost retirement reserves and fund a better lifestyle.

But there's another type: financially downsizing, which typically involves selling a home and buying another that doesn't cost as much, thereby freeing up equity.

Downsizing can also mean buying a less expensive home or, perhaps, moving from a major city to a regional area that offers more affordable housing and lifestyle benefits.

This is why a large portion of the property industry prefers the term 'rightsizing'. It's more about moving to a property that best fits your current needs and circumstances than simply finding a smaller abode.

Why downsize?

People may choose to downsize for many reasons, including:

• Being 'asset rich' but 'cash poor'; a common conundrum among those approaching retirement

• Wanting to live in a better location and willing to compromise on property size

• Being health or mobility restricted and in need of easier living conditions

• Hoping to achieve better home affordability

• Living a lower maintenance, simpler lifestyle

• Planning to travel frequently

• A relationship breakdown

• The death of a partner

It goes without saying that selling up and buying another home is a major life decision. The process needs to be thoroughly thought through.

Here are ten considerations to make when deciding whether to downsize:

1. Downsizing involves considerable planning

You need to ask yourself why you're considering downsizing.

Is it because you'll soon be retiring? Do you want a smaller home because you don't want to maintain a big, empty house anymore? Is it driven by lifestyle or financial reasons, or both? Or do you feel pressured by family members to do so?

A major study into downsizing, completed by the Australian Housing and Urban Research Institute (AHURI) in 2020, found the most common reasons for downsizing among over 55s were:

• Lifestyle (27%)

• Financial (27%)

• Too much maintenance (18%)

• 'Forced' to move (15%)

By considering your motives, you can make sure downsizing is the right option for you at the current time.

Next, you'll need to consider where you might want to move to and the type of home you'd like. Write a list of your 'must haves' and the things you could live without.

This could help you narrow down the type of property that best suits you and give you some idea of what price range you'd be looking at.

2. The downsizer contribution scheme

All downsizers need to be aware of this Federal Government initiative allowing Aussies to boost their superannuation using proceeds from the sale of their family home.

Under the scheme, downsizers aged over 55 can put up to $300,000 from the sale of their principal place of residence into their super, or $600,000 for couples.

Under Australian Taxation Office guidelines, the funds will not count toward the contribution cap.

To be eligible, downsizers must have owned their home for at least 10 years before selling it. This restriction may also help you determine the best time to make your move.

3. Downsizing and pension eligibility

Selling the family home can affect your eligibility for the Age Pension.

As of June 2024, there's a two-year period in which the sale of your asset won't affect your pension if you're using the sale proceeds to secure or renovate a new home. This can be extended up to 36 months in some circumstances.

If only some of the proceeds are going towards a new home and those remaining aren't being put into super, any left over funds are subject to what is called 'deeming'.

That means the government will 'deem' the cash to be a financial investment for the purpose of calculating eligibility for social security, or the level of any payments. How much the cash will be assumed to return is dependent on the deeming rate applicable to your financial situation.

Only the lower deeming rate (currently 0.25%) will be applied to the sale proceeds from a principal home home sold on or after 1 January 2023 during the period of exemption from the assets test.

4. What are the associated costs?

Moving to a smaller house doesn't necessarily mean it's going to be a money-making venture.

Even if you stand to make a profit from the sale of your current home, you still need to consider the costs you may incur by selling, buying, and moving.

Some of the costs you need to take into account are:

• Cosmetic work on your property before it goes to market

• Agent fees

• Stamp duty (some states and territories offer concessions to downsizers and pensioners, so be sure to check your eligibility)

• Legal fees

• Inspection fees

• Moving costs

• New home loan costs

If you're looking for a new home loan, the table below has some of the lowest interest rates on the market for owner occupiers.

Important Information and Comparison Rate Warning

5. What are the financial consequences?

Downsizing is a long-term decision.

Although you may make a financial gain in the short term, will it be sustainable and meet your aims in downsizing in the first place? In some cases, downsizing from an older family home to a more modern smaller one in the same neighborhood may not leave you too much spare change.

A financial planner or accountant can help you understand the implications of various options before you make any decisions. It's also important to get a good idea of your home's current value through an appraisal or a formal valuation so you have an accurate starting point.

A common mistake of many downsizers is to overestimate the value of their current property and underestimate the value of the type of property they have in mind, which can often be in sought-after locations.

6. Low maintenance, low bills

Downsizing can tick more than a few boxes.

While moving to a smaller abode can mean having less space to spread out, a lower maintenance property could provide you with the time and freedom to pursue other interests and enjoy a better lifestyle.

It may also lower the cost of local government rates, maintenance expenses, and utility bills, to name a few expenses.

7. Less room, fewer possessions

Downsizing to a smaller home, or even just moving from somewhere you've lived for an extended time, forces you to declutter. You will likely offload some (or many) of your material belongings, which isn't necessarily a bad thing.

It might be worth selling or donating anything you haven't used in the past five years or items that aren't essential to your daily living.

Many downsizers later report feeling free of the detritus that had been weighing them down for many years, often without them realising it. There is much to be said for living more simply.

8. It's an emotional time

Saying goodbye to a long-term home can be very difficult. Homes are more than just places to sleep, they're also filled with memories, not to mention a sense of security, and stability.

And everything about your current abode may seem rose coloured when you start to consider moving on.

Some people can be crippled by their emotional attachment. One way of dealing with it is to look at the move as a new chapter.

Difficult as it is, sometimes practical considerations have to take precedence, with the hard decision taken before you run out of time to control the outcomes yourself.

Try to think of it as a move that can provide a better lifestyle, a better financial outcome, and offer a new place to make memories.

9. It can take time to adjust

Only 22% of downsizers stay in the same area, according to AHURI research.

Leaving your social and support network can be a huge wrench and needs to be carefully considered before taking the leap.

You may feel a sense of displacement if, after spending many years in your old home and neighbourhood, you move to a different patch, even if it's undoubtably the right choice.

Some downsizers can interpret this early ambivalence as regret and feel they've made the wrong decision.

Several US studies have found contentment among downsizers is heavily reliant on whether they felt pressured to move in the first place.

It helps to make peace with your decision and your new location. Then, give yourself time to find your feet in your new environment.

Try to treat it as something of an adventure, opening you up two new places, routines, and people.

10. It may not be your only option

While downsizing could seem the only solution to a situation, it may not be the only option you have. Here are a few scenarios that could work for you:

• If you're looking to make money from your principal asset, you could consider renting out a room or two, or perhaps house sharing with a friend or someone in a similar situation to help cover the cost of expenses and maintenance.

• You could invite family members to live with you. This can be a win-win situation, particularly for younger relatives who might be looking to save for a deposit for their own home.

• You could consider finding tenants to live in your home while you rent a smaller, less expensive place for yourself and pocket the extra income. By doing this, you can take advantage of the so-called 'six-year rule', which allows taxpayers to rent out their home for up to six years without being hit by capital gains tax (CGT) when it's eventually sold. It could also be a good trial run before you take the step to sell up and downsize permanently.

• If you're moving for health or mobility issues, you could consider buying into a retirement community. These are generally priced to target downsizers selling family homes, leaving them with some cash left over. Many retirement communities also offer a range of support services as part of the deal. But, be warned, buying an apartment in a retirement village is not like buying a normal property. You should seek financial and legal advice so to understand how any arrangement works and the ongoing costs involved.

• If you'd like to be closer to loved ones, consider whether a granny flat might suit your needs. You could sell your home and use some of the funds towards constructing a secondary dwelling on an existing property. Again, it's wise to get some professional financial and legal advice to clearly understand what's involved. You'll also need to check whether the building regulations of the relevant local council allows for such construction.

• If money worries are eating at you, you could explore the option of releasing some of the equity in your home through a product like a reverse mortgage. Reverse mortgages are a type of loan specifically designed for pensioners and retirees who are asset rich and cash poor. Borrowers are generally not required to make payments on the mortgage until the property is sold or the last borrower on the contract has passed away.

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