Four steps to take before downsizing your home
By Rachel Lane
For many of us later in life, the property we’re in can often feel like our “forever home” – one which you’ll live in well into your retirement years. For this reason, making the call to downsize your home can feel like a big decision, one which will take some research to get right.
Understand why you want to downsize: This is a crucial first step. There are numerous reasons why people decide to downsize: some want a “sea change” or a “tree change”, some want a low-maintenance home in their current neighbourhood, some want to be closer to family, and others are motivated by being more socially connected.
The property we’re in can often feel like our “forever home”, so making the call to downsize can feel like a big decision.Credit: Simon Letch
There can be financial motivations for downsizing too: paying off debt, freeing up equity to invest or spend, reducing home maintenance costs, having lower property taxes and utility bills, giving you more money (and time) to spend doing the things you love.
Work out where: Where you live affects how you live, and you can’t change it without moving again, so give some thought to the people and places you want to be close to (or far from). There may be friends or family, a beach or a sporting club that you would like to be close to.
If you don’t like noise then you may not want to be too close to places where people gather. If you are downsizing interstate and intend to have frequent visitors then you may want your new home in reasonable proximity to an airport.
As part of your where you will also need to look at your accommodation, giving thought to the spaces you will need. While you may be fit and healthy now, if you are planning to stay in your new home for many years then it’s a good idea to ask yourself “what happens if I need care?“
Many newer homes, particularly granny flats and in retirement communities, are built with a view to delivering care in the future. Look for things in the home that may make access difficult, like narrow doorways and pokey bathrooms.
Few people plan to spend their days watching television, but if you don’t plan anything else that’s what you can find yourself doing. So when you’re thinking about where to downsize, ask yourself “How will I spend my time?”
Understand what you are signing: Whether your new home is freehold or strata title, a leasehold or licence agreement in a retirement community, or a granny flat arrangement, you will need to sign a contract. The role of your contract is to detail your rights, responsibilities, and costs. Your job is to work out whether it fairly balances these three elements.
Granny flat arrangements can be particularly complex as they involve family, and are not necessarily on commercial terms. If it goes wrong the whole family can be affected.
Crunch the numbers: While the purchase price of your new home may be obvious there can be a lot more to the transaction than that. In retirement communities, there can be exit fees which can involve complicated formulas that often include a Deferred Management Fee (DMF) which is typically a percentage of either your purchase price or your future sale price.
There can also be sharing in capital gain or loss with the village operator, and you may also need to pay for renovations, marketing fees and selling costs. If your new home is freehold or strata then while you don’t need to think about a DMF, you may need to factor in stamp duty, owners corporation fees and the potential for special levies.
Granny flat arrangements are normally with family but that doesn’t mean they are free. You will still need to work out how much you pay upfront, while you live there and when you leave. In most granny flat arrangements you don’t get any of the amount you have paid back. In some cases, because of state-based laws, you may actually need to pay to have your granny flat removed and the landscaping reinstated after you leave.
Once you have worked out the costs of your new home the next step is to look at the bigger financial picture.
How much money will you have to invest or spend, how much age pension (and other benefits) you can receive, your cash flow, and in the longer term the amount of money you will have should you need aged care and what would be left to your estate.
The where and why of your downsizing decisions are just as important as the contract you sign and what it costs. After all, getting good bang for your buck when it comes to downsizing often comes down to how you spend your time and who you spend it with.
Rachel Lane is co-author of Aged Care, Who Cares and Downsizing Made Simple. She is also the creator of Village Guru, a software programme designed to take the financial confusion out of downsizing.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
For expert tips on how to save, invest and make the most of your money, delivered to your inbox every Sunday, sign up for our Real Money newsletter here.